Globalization, Labour Market and the Swedish Welfare State

INTRODUCTION 
Globalization is a huge phenomenon that is currently 
developing very much, especially in terms of market 
liberalization and integration, having a strong impact on 
the modern society. Actually it creates both threats and 
opportunities for the different countries, depending on 
their capacity to deal with its effects. 
As it has generated both positive and negative 
consequences in several areas in the last decades, 
globalization has been defined as “electricity”: if you put 
your finger in a socket, it‟s bad; but if you use it to plug 
1
in things that improve your well-being, it‟s wonderful. 
One of the most influenced areas, by the global 
pressures, is certainly the labor market, which has to 
properly respond in order to adapt itself to the 
continuously changing conditions. 
Globalization, in fact, plays an important role in defining 
the specialization patterns of the countries, which have 
an effect both on their comparative advantage and on 
their unemployment rate and wages. Developing 
countries are, for instance, improving their low-skilled 
1
 This definition of the WHO was used to describe the relationship between 
globalization and health, but it can without doubt be used as a general definition of the 
relationship between globalization and the economic dimension (World Health 
Organization, (2001)). 
7 
labor intensive goods, while the industrialized countries 
are specializing on the high-skilled labor intensive goods 
and services. This leads to an increase in the demand of 
low-skilled workers in the former, and an increase in the 
demand of high-skilled workers in the latter. It is, 
therefore, the role of the welfare states, to make some 
adjustments in the labor markets, in order to guarantee a 
sustainable level of employment, wages and labor 
conditions. 
The aim of this work is to analyze the complex 
relationship between globalization, with its consequent 
effects on the labor market, and the welfare state models. 
In particular, how these try to respond to the global 
pressures in different ways, which originates diverse 
welfare state systems. The analysis will be conducted first 
from a theoretical point of view, and then it will be 
focused on the specific case of Sweden. 
In section 1, the general phenomenon of globalization is 
deeply examined both as a phenomenon by itself, and in 
its theoretical relationship with the labor market. With 
this respect, the result of the most important models of 
economic theory (Heckscher-Ohlin and Stolper-
Samuelson models) are presented, in order to later find 
out, in section 3, if these are realized in the Swedish labor 
market. 
8 
The phenomena of outsourcing, offshoring, and FDI are 
analyzed as well, together with their theoretical effects on 
the labor market. In addition, the problem of job 
displacement is presented, as it is strictly connected to 
the welfare states‟ labor market policies. 
Section 2, is dedicated to the relationship between 
globalization and welfare state. This, beyond being a 
complex nexus, has, actually evolved with time, and 
welfare states have adopted different measures to 
respond to the effects of globalization. Thus, the different 
European Social Models (Nordic, Anglo-Saxon, 
Continental and Mediterranean model) are described in 
detail, underlining both their main features and tools. 
This is followed by a consequent analysis of these general 
instruments: the social benefits, the employment 
protection legislation, the activation labor market 
policies and the approach of flexicurity. 
Section 3, instead, deals with the practical analysis of the 
case of Sweden: how globalization has affected the 
Swedish labor market, and how the Swedish welfare state 
has reacted to these pressures. Firstly, the effects of 
globalization on the Scandinavian country‟s economy are 
examined, considering the importance of international 
trade, offshoring and FDI for the country. Secondly, the 
Swedish labor market is studied, considering its general 
characteristics, and the changes provoked by 
9 
globalization on its employment structure and the weak 
categories of workers. Thirdly, the main instruments 
used by the labor market to respond to the global 
pressures are analyzed: the employment protection 
legislation, the unemployment benefits and the 
activation policies. In addition, a brief description of the 
organizational structure of Sweden‟s welfare state, with 
regard to the labor market policies, is given, together 
with a deepening on the Swedish pension system. 
The Swedish welfare state is, thus, analyzed both from an 
historical perspective, in order to understand how it has 
become like it is in the current days, and from the 
present perspective underlining its characteristics of 
capitalistic welfare state. 
Finally, section 4 treats the future challenges both for the 
Swedish labor market and thus for the welfare state. An 
attempt to answer to a very important question - “is the 
Swedish welfare state a best practice?” – will be given. 
With this respect, the areas of improvement of the labor 
market in Sweden will be analyzed, together with some 
suggestions in order to improve the discussed 
weaknesses. In conclusion, it will be tried to give a vision 
about what is going to happen in the next future and 
what will be the trends of the Swedish labor market and 
welfare state, also in relation to the current economic 
crisis. 
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CHAPTER 1 
“GLOBALIZATION AND ITS EFFECTS ON 
THE LABOR MARKET” 
1.1 The phenomenon of Globalization 
In the last thirty years an increasing level of market 
liberalization and integration has characterized the 
world‟s economy. The term “Globalization” is used to 
identify events whose field of action covers the whole 
world, not remaining just at a national level. Market 
Globalization is just one aspect of the nowadays bigger 
phenomenon of intensification of social relations and 
international openness. 
It is possible to define market Globalization as the 
growth of economic interdependence between countries 
through the increasing level of international trade, the 
more and more intensive movements of capitals, labor 
2
and technology all around the world. The borders 
between countries have become less relevant for goods, 
services and endowments that move from one side of the 
world to the other. Financial markets are deeply 
integrated thanks to a strong deregulation and the 
2
 Quintieri B., Tema del mese: l‟era della Globalizzazione. 
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improving information technologies that permit 
thousand of transactions per day. The production of 
goods and services is increasingly fragmented into 
different phases that are realized in different countries, 
due to the phenomenon of outsourcing and offshoring, 
through which companies are looking for the most 
productive and cheapest way of production. The new 
international division of labor, and the increasing 
number of actors in the global scene have lead to 
structural adjustments, differing from country to 
country, in relation to the different productive 
specialization. 
Economists and international institutions have generally 
a positive opinion about globalization, as they focus on 
the gains that it leads to. The soaring integration has in 
fact contributed, together with a strong technological 
development, to increase wealth and income, and the 
major openness to international trade has a very positive 
3
influence on growth. First of all, trade does conduct to 
absolute convergence to similar level of incomes among 
countries. Secondly, trade increases productivity as 
openness spreads knowledge and technologies among 
countries, enabling firms to determine the most efficient 
way of producing. This leads to a growth in productivity 
3
 A. Berg, A. Krueger, (2003). 
12 
and, consequently, of exports, that increases the 
country‟s income. Productivity also improves thanks to 
the best quality of inputs that can be imported from 
other countries: openness and trade in fact allow 
specialization in relation to each country‟s comparative 
advantage. A third factor is that trade reduces corruption 
and monopoly power, which is a typical example of 
imperfect competition in closed economies. It‟s in fact 
almost impossible for just one firm to control the whole 
market in an open economy. Trade also encourages 
institutional reforms, which are fundamental 
prerequisites for trading relationships. 
But the public opinion has often a negative position 
regarding globalization, arguing that it increases social 
4
inequalities, that it is profitable only for large companies 
5
and not for citizens, and especially that it has negative 
6
effects on the labor market. 
The effects of globalization on the labor market are 
surely one of the main aspects of the economical analysis 
of globalization. What has been happening in the last 
decades is that wages of the unskilled workers are falling 
in the developed countries and their unemployment is 
growing, while there is an opposite tendency in the 
4
 According to the Eurobarometer (2008) 56% of the Europeans agree with this, 
while the 26% disagree. 
5
 European Commission, (2008c). 
6
 European Commission (2005). 
13 
developing countries where the exportations of labor-
intensive goods are increasing, leading to a catch up of 
the unskilled workers wages. Western countries do in 
fact import an increasing quantity of goods from 
developing countries, characterized by a high level of 
unskilled labor, which decreases the demand of national 
unskilled labor. A consequence of this phenomenon is 
that unemployment has increased, and there is a larger 
gap between wages of skilled and unskilled workers. 
It is though interesting to underline that the same effect 
of contraction of the demand of labor, especially in the 
labor-intensive sectors, where there is a high competition 
from the developing countries, is also caused by the 
continued development of technology. Improving the 
techniques of production reduces the demand of 
unskilled labor, similar to what globalization does. Thus, 
it is very important to separate these two phenomena in 
the analysis, in order to observe only the effects of 
globalization on the labor market, our area of interest. 
1.2 Globalization and labor 
In the last fifty years the volume of international trade 
has constantly grown at a high rate; services have 
14 
become more important; foreign direct investments are 
increasing and constitute nowadays a fundamental step 
for MNCs. These are all consequences of globalization 
that, together with a fast improvement of innovations 
and technologies, has changed the international division 
of labor. A growing rate of unemployment is also an 
aspect that is characterizing the global economy in the 
last years. Opponents to globalization attribute this 
downturn in the labor market to the international 
integration and markets openness. 
It is thus very important to analyze the mechanism that 
is beneath these effects and have a review of the 
literature about it. 
1.2.1 Theoretical models: H-O and Stolper-Samuelson 
Traditional trade theories analyze the different factor 
endowments of the countries to understand the different 
levels of international trade. Factor endowments based 
on Heckscher-Ohlin theory is one of the most broadly 
accepted. The H-O model is a 2x2x2 model, which means 
that there are two countries, two goods and two factors. 
The factors that are usually considered are capital and 
labor, or land and labor; the goods instead differ in their 
factor intensity, that is, at any given wage-rental ratio, 
15 
production of one of the goods use a higher ratio of 
7
capital to labor than production of the other. Thus, the 
H-O theorem affirms that in free trade a country will 
export the commodities and the services that intensively 
use its relative abundant factor, and it will import the 
commodities and the services of its relative scarce 
8
factor. Therefore, relative endowments of the factors of 
production (land, labor and capital) determine a 
country‟s comparative advantage. According to this 
model there are winners and losers from international 
9
trade, as the owners of a country‟s abundant factors gain 
10
from trade, while the owners of scarce factors lose. So, 
applied to the contemporary reality, the H-O theorem 
highlights the reason why industrialized countries export 
capital-intensive goods, while they import labor-
intensive goods from developing countries. 
Related to the H-O model, the Factor-price-equalization 
(FPE) theorem asserts that free and competitive trade 
will make factor prices converge along with traded goods‟ 
prices, as long as production technologies are identical 
and characterized by constant returns to scale and 
7
 Krugman P.R., Obstfeld M., (2009). 
8
 Markusen J.R., Melvin J.R., Kaempfer W.H. and Maskus K.E., (1995). 
9
 In the Ricardian model instead, where there is just one factor of production 
(labor), everybody gains from trade and this lead in most cases to complete 
specialization (Markusen J.R., Melvin J.R., Kaempfer W.H. and Maskus K.E., 
(1995)). 
10
 But there are still gains from trade in the sense that the winners could 
compensate the losers everyone would be better off. 
16 
11
countries are not fully specialized. There are various 
economic forces that should bring factor price 
12
convergence. 
The first is specialization. As the industrialized countries 
(capital-abundant) find new trade opportunities with the 
developing countries (labor-abundant), the formers stop 
producing labor-intensive goods and specialize in 
capital-intensive ones. On the contrary, the developing 
countries, which are rich in labor, specialize in the 
production of labor-intensive goods. Both specialization 
processes lead also to a reduction of the wage gaps, as the 
demand for unskilled labor in the developed countries 
decreases, while it rises in the developing ones. 
The second force is given by capital flows. Capital moves, 
in fact, from industrialized countries to developing 
countries, because of the higher rate of return offered by 
the last ones. Capital permits, thus, the creation of new 
jobs in the developing countries and makes the local 
labor demand grow and this raises wages. In the 
developed countries, instead, the opposite process takes 
place, making wages converge. 
The third force is the spill-over of technological 
knowledge. This is usually transferred through 
observation and imitation, even though there might be 
11
 Markusen J.R., Melvin J.R., Kaempfer W.H. and Maskus K.E., (1995). 
12
 Sinn H.W., (2007). 
17 
patents and intellectual property rights to protect it. 
13
However patents expire after some years, and most of 
the technological knowledge is not protected, because it 
is too widespread to be patented. 
The fourth force of FPE is migration. People mainly 
migrate from low-wage developing countries to high-
wage developed countries, and this makes labor scarcer 
in the first countries and more abundant in the second 
14
ones, reducing the international wage differences. But 
all this happens only in an idealized model, as in reality 
complete FPE is not observed because of wide 
differences in resources, barriers to trade, rigid wages 
and international differences in technology. 
Strictly connected to the Heckscher-Ohlin‟s model is the 
Stolper-Samuelson theorem that underlines the 
relationship between goods prices and factors prices. 
According to the Stolper-Samuelson theorem, in fact, if 
there are constant returns to scale and both goods (the 
capital-intensive and the labor-intensive one that are in 
H-O model) continue to be produced, a relative increase 
in the price of a good will increase the real return to the 
factor used intensively in that industry and reduce the 
15
real return to the other factor. According to the Stolper-
Samuelson model the entrance of the developing 
13
 Usually after 30 years (Sinn H.W., (2007)). 
14
 Sinn H.W., (2007). 
15
 Markusen J.R., Melvin J.R., Kaempfer W.H. and Maskus K.E., (1995). 
18 
countries in the international competition, due to the 
reduction of trade barriers and transport costs, permits 
to labor-intensive goods, produced in the East countries, 
to substitute the ones coming from the industrialized 
countries. As a result, the demand of unskilled labor 
decreases in the Western countries making 
unemployment grow. 
1.2.2 Empirical evidence 
The standard theory of international trade, the 
Heckscher-Ohlin-Samuelson model, can be resumed in 
16
some important predictions. 
The first one is that the relative world price of the 
relatively unskilled labor intensive good will fall. 
Secondly the production of this kind of good will fall and 
an inter-sectoral substitution of production towards the 
skilled labor intensive good will take place in the 
developed countries. The third point is that the imports 
from developing countries of unskilled labor intensive 
goods will reduce the demand for unskilled workers in 
the industrialized countries and this will lead to a 
decrease in relative wages for the unskilled workers. 
Fourth and last prediction is that the rise in the real 
wages of skilled workers and the reduction of the real 
16
 Petrucci A., Quintieri B., (1999). 
19 
wage of unskilled ones will come with an increase in the 
relative employment of unskilled workers in all sectors. 
But does empirical evidence agree with these theoretical 
predictions? It is possible to state that it is mixed on the 
17
HOS model, even though most economists do not 
believe that differences in factors can alone explain the 
differences in world trade. Of course there is evidence in 
the industrialized countries of the decrease of the shares 
of wages on GDP, but this cannot just be attributed to 
globalization. Actual trends in the international trade 
flows seem, although, to support the first two 
predictions, but there is no consent about their empirical 
relevance. Some authors, in fact, state that there is no 
evidence of relative price changes and intersectoral shifts 
18
in production, and that there is no unique tendency of 
the fall of unskilled goods relative prices, while others 
19
consider these phenomena more relevant. 
As for the third prediction, falling demand for unskilled 
workers in the industrialized countries and a consequent 
fall in their relative wages, there is a large amount of 
evidence, even though there is no evidence of a causal 
relation between these phenomena and globalization. 
Many economists state that the labor market effects of 
trade are small, and that the real cause of increased 
17
 It means Heckscher-Ohlin and Stolper-Samuelson theorems. 
18
 Lawrence R.Z., Slaughter M.J., (1993). 
19
 Sachs J.D., Shatz H., (1994). 
20 
unemployment of unskilled workers in industrialized 
countries and of the fall in their relative wages is 
technological change. 
Finally there is no evidence about the fourth prediction 
of the rise in real wages of skilled workers and the 
reduction of real wage of unskilled ones, that would be 
accompanied by an increase in the relative employment 
20
of unskilled workers in all sectors. 
1.3 Human capital, quality and trade 
As it has been demonstrated, there is no strict 
relationship between the theoretical models and the 
empirical evidence about the effects of globalization on 
the labor market. The classical literature is without doubt 
an essential starting point and the base for further 
researches, but it doesn‟t get all the links that connect 
these phenomena. 
21
To this end a new model will be introduced, whose aim 
is to analyze why globalization has lead only to a limited 
intersectoral reallocation of production. The model is 
based on two main assumptions. The first one states that 
it is possible to focus on intra-industry trade, instead of 
20
 Petrucci A., Quintieri B., (1999). 
21
 Petrucci A., Quintieri B., (1999). 
21