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Unemployment and Welfare State: What do the Data Tell Us?

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  • DING, HONG

Abstract

The aim of this paper is to analyze the relationship between welfare expenditure by government and unemployment outcomes. Using a panel of 34 OECD countries from 1980 to 2010 and a two-way fixed effect model for panel data subject to endogeneity test and persistence test, the results of the paper suggest that total welfare expenditure as a percentage of GDP has a statistically significant positive impact on unemployment outcomes (total unemployment, long-term unemployment and youth unemployment). Among the four major components of national welfare expenditure, only income support and pension benefit are found to have the significant positive effect on all unemployment outcomes, public expenditure on health services has marginally significant positive impact on total unemployment rate, but not on long-term unemployment rate and youth unemployment rate and public social expenditures on other social services provided by government have no significant impact on unemployment. The econometric estimation results also provide evidence to support the hypothesis that one channel through which public social expenditure impacts unemployment is investment rate and the hypothesis that immigration can decrease a nation’s total unemployment rate.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 41921.

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Date of creation: 12 Oct 2012
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Handle: RePEc:pra:mprapa:41921

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Keywords: unemployment; welfare state; endogeneity; IV estimation for panel data; public social expenditure; Durbin-Wu-Hausman test;

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  1. Beraldo, Sergio & Montolio, Daniel & Turati, Gilberto, 2009. "Healthy, educated and wealthy: A primer on the impact of public and private welfare expenditures on economic growth," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 38(6), pages 946-956, December.
  2. Agell, Jonas & Lindh, Thomas & Ohlsson, Henry, 1997. "Growth and the public sector: A critical review essay," European Journal of Political Economy, Elsevier, vol. 13(1), pages 33-52, February.
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