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Welfare benefits and the rate of unemployment: some evidence from the European Union in the last thirty years

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Author Info

  • George C. Bitros

    (Athens University of Economics & Business)

  • Kyprianos Prodromidis

    (Athens University of Economics & Business)

Abstract

Our objective in this paper is to re-examine the hypothesis that welfare benefits may be responsi-ble for the observed differences in cross- country unemployment rates and test its validity by using panel data from 19 countries over the 1970-2000 period. For this purpose, we set up a general equi-librium model encompassing the private and public sectors of the economy, where the government comes to the relief of the unemployed by increasing the welfare benefits per man. From this model, we extract an unemployment rate equation. The results that emerge from the empirical analysis sug-gest that social benefits per man may indeed adversely influence the rate of unemployment in EU-15. But the results change significantly when the EU member states are classified as high-, low- and average unemployment countries. In particular, we find that, whereas unemployment benefits exert perceptible positive influences in the high and average unemployment sub-groups, their influence in the low unemployment sub-group is nil. This finding, in conjunction with the evi-dence that the unemployment rate is invariant with respect to social benefits in USA and Canada, leads us to the conclusion that some EU countries may have to restructure their welfare systems, so as to reduce welfare benefits in favour of greater labour market flexibility and self-reliance on the part of workers.

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File URL: http://128.118.178.162/eps/mac/papers/0410/0410004.pdf
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Bibliographic Info

Paper provided by EconWPA in its series Macroeconomics with number 0410004.

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Length: 20 pages
Date of creation: 19 Oct 2004
Date of revision:
Handle: RePEc:wpa:wuwpma:0410004

Note: Type of Document - pdf; pages: 20
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Web page: http://128.118.178.162

Related research

Keywords: unemployment rate; welfare benefits; European Union;

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References

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  1. Katharine G. Abraham & Susan N. Houseman, 1993. "Does Employment Protection Inhibit Labor Market Flexibility? Lessons from Germany, France, and Belgium," NBER Working Papers 4390, National Bureau of Economic Research, Inc.
  2. Rebecca M. Blank, 1994. "Public Sector Growth and Labor Market Flexibility: The United States versus the United Kingdom," NBER Chapters, in: Social Protection versus Economic Flexibility: Is There a Trade-Off?, pages 223-264 National Bureau of Economic Research, Inc.
  3. Horst Siebert, 1997. "Labor Market Rigidities: At the Root of Unemployment in Europe," Journal of Economic Perspectives, American Economic Association, vol. 11(3), pages 37-54, Summer.
  4. Lindbeck, Assar, 1995. "Hazardous Welfare-State Dynamics," American Economic Review, American Economic Association, vol. 85(2), pages 9-15, May.
  5. Rebecca M. Blank & Richard B. Freeman, 1994. "Evaluating the Connection between Social Protection and Economic Flexibility," NBER Chapters, in: Social Protection versus Economic Flexibility: Is There a Trade-Off?, pages 21-42 National Bureau of Economic Research, Inc.
  6. Stephen Nickell, 1997. "Unemployment and Labor Market Rigidities: Europe versus North America," Journal of Economic Perspectives, American Economic Association, vol. 11(3), pages 55-74, Summer.
  7. C Bean, 1992. "European Unemployment: A Survey," CEP Discussion Papers dp0071, Centre for Economic Performance, LSE.
  8. Lindbeck, Assar, 1995. "Hazardous Welfare-State Dynamics," Working Paper Series 428, Research Institute of Industrial Economics.
  9. Rebecca M. Blank, 1993. "Public Sector Growth and Labor Market Flexibility: The United States vs. The United Kingdom," NBER Working Papers 4339, National Bureau of Economic Research, Inc.
  10. Blanchard, Olivier & Jimeno, Juan F, 1995. "Structural Unemployment: Spain versus Portugal," American Economic Review, American Economic Association, vol. 85(2), pages 212-18, May.
  11. Greenwald, Bruce C & Stiglitz, Joseph E, 1995. "Labor-Market Adjustments and the Persistence of Unemployment," American Economic Review, American Economic Association, vol. 85(2), pages 219-25, May.
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