Santiago López-Cariboni: "Trade, Informality, and Social Insurance."
Abstract: Existing accounts of compensation to trade losers in developing countries systematically exclude social insurance spending from the so-called "embedded liberalism compact". Against this view, I show that the distribution of power between different labor markets groups, i.e., formal and informal labor, determines whether governments use contributory social insurance programs to compensate labor market insiders. With democracy, as formal workers become more electorally powerful, they are also more likely to get social insurance compensation when they most need it. The analysis of 50 democratic developing countries reveals that openness has positive effects on social insurance spending when the insider group size is large. Evidence also shows that this effect is even magnified during negative income shocks. The implication is that developing country incumbents have used social insurance as a part of the embedded liberalism compact in a counter-cyclical manner when the group of insiders is electorally relevant, this is, in contexts of low labor informality.