On the Contribution of Economic Analysis to Social Policy

This paper examines the contribution of economics to the analysis of social policy. How can economic analysis help us understand and design the welfare state? I seek to answer this question with reference to social transfers in OECD countries. I focus in particular on the relation between social transfers and the economy, notably the impact on employment. I conclude that the economic analysis of social policy has made great strides, but has someway yet to go. Theoretical models are not sufficiently developed for us to be confident of having included all major elements of the picture. The move from microbehaviour to macroaggregates is in urgent need of closer examination. Empirical research is far from conclusive, and even apparently large differences in behaviour may be interpreted in different ways. The main contribution of economics is to provide a rigorous framework for organising our thinking. This often points to aspects which otherwise are neglected and distinguishes different arguments which are confounded in public debate. It helps us recognise and quantify the way in which social policy affects the margins relevant to key decisions.