Abstract Outlines a new approach to the study of the welfare state. Contrary to the emphasis on ‘decommodification’ in the current literature, it is argued that important dimensions of the welfare state—employment protection, unemployment protection, and wage protection—are designed to make workers more willing to invest in firm‐ and industry‐specific skills that increase their dependence on particular employers and their vulnerability to market fluctuations. Workers will only make such risky investments when they have some insurance that their job or income is secure; otherwise, they will invest in general, and therefore portable, skills. In turn, because the skill composition of the work force constrains the set of product‐market strategies that firms can pursue successfully, employers will support social protection that facilitates the set of skills that they need to be competitive in particular international product markets. It shows that the argument is consistent with observed clusters of social protection and skill profiles among OECD countries, and that these clusters are associated with very different distributional outcomes and patterns of gender‐specific labour market segmentation.
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