Income Inequality, Globalization, and the Welfare State: Evidence from 23 Industrial Countries, 1990–2009

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The debate regarding the welfare state–weakening effect and the income inequality-increasing effect of globalization remains a contentious issue among stratification scholars. For some, globalization increases income inequality, while for others, globalization has no, or a negligible, effect on income inequality. This study brings new evidence to bear on this debate by separately investigating effects of multiple indicators of globalization (international trade, foreign direct investment [FDI] and immigration), and of welfare state generosity (government social-protection spending) on (1) income inequality before taxes and transfers and (2) income inequality after taxes and transfers, using data from 23 Organisation for Economic Co-operation and Development (OECD) countries over 1990–2009. First, results show a positive effect of international trade, a negative effect of immigration, but no effect of FDI and government social-protection spending on income inequality before taxes and transfers. Second, results show no effect of the globalization indicators but a negative effect of government social-protection spending on income inequality after taxes and transfers. These findings suggest that (1) globalization has inequality-increasing effects depending on measures of income inequality; (2) the welfare state, in many OECD countries, continues to shape income distribution; and (3) in contrast with the popular narrative, immigration may decrease income inequality.

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