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Do Social Policies Harm Employment and Growth?

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  • Frederick van der Ploeg

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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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 886.

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

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

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References

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Cited by:
  1. Hassan Molana & Catia Montagna, 2005. "Aggregate Scale Economies, Market Integration and Optimal Welfare State Policy," International Trade 0509006, EconWPA.
  2. Hassan Molana & Catia Montagna, 2003. "Welfare State, Market Imperfections and International Trade," Dundee Discussion Papers in Economics 146, Economic Studies, University of Dundee.
  3. Lans Bovenberg, 2003. "Tax Policy and Labor Market Performance," CESifo Working Paper Series 1035, CESifo Group Munich.
  4. Molana, Hassan & Montagna, Catia, 2007. "Expansionary effects of the welfare state in a small open economy," The North American Journal of Economics and Finance, Elsevier, vol. 18(3), pages 231-246, December.
  5. F. Heylen & R. Van De Kerckhove & -, 2009. "Fiscal policy, employment by age, and growth in OECD economies," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 09/623, Ghent University, Faculty of Economics and Business Administration.
  6. Alfonso Arpaia & Giuseppe Carone, 2004. "Do labour taxes (and their composition) affect wages in the short and the long run? - Alfonso Arpaia and Giuseppe Carone," European Economy - Economic Papers 216, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission.
  7. Benos, Nikos, 2009. "Fiscal policy and economic growth: empirical evidence from EU countries," MPRA Paper 19174, University Library of Munich, Germany.

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