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.

David E. Wildasin / dew@davidwildasin.us