This paper analyzes the consequences of international capital mobility for national social-transfer policy and unemployment in a model with workers of different skill and income levels. Social transfers may cause unemployment of low-skilled workers if the transfer level exceeds their potential incomes on the labor market. Because of these employment effects, social transfers may influence the international allocation of capital. The equilibrium transfer policy with capital mobility may differ from the policy in a closed economy. However, as the paper shows, capital mobility does not necessarily imply a reduction of social transfers. The paper also considers capital taxes and the supply of public consumption goods in this framework.