Factor Mobility, Risk and Redistribution in the Welfare State

Economic integration reduces the costs of factor mobility, producing efficiency gains and contributing to equalization of net factor returns. This raises the cost of income-redistribution policy, thus threatening a basic function of the welfare state. A simple model of costly factor mobility under uncertainty shows that greater factor mobility enables factor owners to pool industry-specific, region-specific or occupation-specific risks (due to uncertain technology or terms of trade). Economic integration may thus reduce some of the potential social insurance benefits of redistributive policy.