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Do Social Policies Harm Employment and Growth?

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Author Info
Frederick van der Ploeg ()

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Abstract

In economies with competitive labour markets social policies harm employment and output. In Europe, in particular, non-competitive labour markets with trade unions, efficiency wages and/or costly search and mismatch seem more realistic. Social policies such as progressive taxation or facilitating corporatism may well induce wage moderation and boost employment and output. Although unconditional unemployment benefits destroy jobs, conditional benefits may spur job growth. In a second-best world usual effects of social policies are thus overturned. In addition, the incidence of taxation and the effects of tax progressivity depend crucially on the specific features of the welfare state, e.g., whether benefits are indexed to wages or not. In a full political-economic equilibrium a more equitable distribution of income and assets leads to a median voter who is better off and thus votes for less 'populist' policies. Hence, employment and economic growth will be higher and inflation lower. In general the supremacy of 'laisser faire' is questioned also by international comparisons.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number CESifo Working Paper No. 886.

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Date of creation: 2003
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Handle: RePEc:ces:ceswps:_886

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Related research
Keywords: social policies; conditional unemployment benefits; non-competitive labour markets; employment; growth; politics;

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Find related papers by JEL classification:
E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
H00 - Public Economics - - General - - - General
J00 - Labor and Demographic Economics - - General - - - General
O40 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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  7. Rodrik, Dani, 1997. "The 'paradoxes' of the successful state," European Economic Review, Elsevier, vol. 41(3-5), pages 411-442, April. [Downloadable!] (restricted)
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  16. Finn, Mary G, 1998. "Cyclical Effects of Government's Employment and Goods Purchases," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(3), pages 635-57, August.
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  20. Driffill, John & van der Ploeg, Frederick, 1995. " Trade Liberalization with Imperfect Competition in Goods and Labour Markets," Scandinavian Journal of Economics, Blackwell Publishing, vol. 97(2), pages 223-43, June.
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Hassan Molana & Catia Montagna, 2005. "Aggregate Scale Economies, Market Integration and Optimal Welfare State Policy," International Trade 0509006, EconWPA. [Downloadable!]
    Other versions:
  2. Bovenberg, A.L., 2003. "Tax policy and labor market performance," Discussion Paper 90, Tilburg University, Center for Economic Research. [Downloadable!]
    Other versions:
  3. Hassan Molana & Catia Montagna, 2005. " Expansionary Effects of the Welfare State in a Small Open Economy," CDMA Conference Paper Series 0505, Centre for Dynamic Macroeconomic Analysis. [Downloadable!]
    Other versions:
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