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Economic growth and welfare state: a debate of econometrics

  • DING, HONG

This study uses a two-way fixed effect model for panel data of all OECD nations, which includes most of the determinants of growth in previous empirical growth studies for either cross section or panel data as control variables and carefully checks possible endogeneity of the key variables of interest: welfare measures by Durbin-Wu-Hausman test. The empirical analysis shows a robust negative correlation between welfare spending rate, tax-to-GDP ratio and GDP growth. In particular, the estimates suggest that a 1% increase in welfare spending as percentage of GDP would increase the per capita GDP growth rate by 0.19%. Among three biggest components of welfare expenditure, pension spending is identified as the most important source of detrimental effect on growth while income support and public health expenditure are found to have no significant impact on growth. I also find that a 1% increase in tax revenue-to-GDP ratio would increase the per capita GDP growth rate by 0.18%. Since this estimate is close to that of welfare spending rate and welfare spending is only part of tax revenue used by government, it implies that decreasing welfare expenditure is more important and more effective for promoting growth than cutting tax. All results are subject to robustness checks including unit root test for panel data, slope poolability test, dependent variable persistence test, informal check of IV exogeneity and serial correlation test.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 39685.

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Date of creation: 20 Jun 2012
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Handle: RePEc:pra:mprapa:39685
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  1. Jeffrey M. Wooldridge, 2001. "Econometric Analysis of Cross Section and Panel Data," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262232197, June.
  2. Muysken, Joan & Ziesemer, Thomas, 2011. "Immigration and growth in an ageing economy - version 2," MERIT Working Papers 037, United Nations University - Maastricht Economic and Social Research Institute on Innovation and Technology (MERIT).
  3. 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.
  4. Choi, In, 2001. "Unit root tests for panel data," Journal of International Money and Finance, Elsevier, vol. 20(2), pages 249-272, April.
  5. Barro, R.J., 1988. "Government Spending In A Simple Model Of Endogenous Growth," RCER Working Papers 130, University of Rochester - Center for Economic Research (RCER).
  6. Heckman, James J, 1976. "A Life-Cycle Model of Earnings, Learning, and Consumption," Journal of Political Economy, University of Chicago Press, vol. 84(4), pages S11-44, August.
  7. Olivier Jean Blanchard & Stanley Fischer, 1989. "Lectures on Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262022834, June.
  8. Bruce Headey & Robert Goodin & Ruud Muffels & Henk-Jan Dirven, 2000. "Is There a Trade-Off Between Economic Efficiency and a Generous Welfare State? A Comparison of Best Cases of `The Three Worlds of Welfare Capitalism’," Social Indicators Research, Springer, vol. 50(2), pages 115-157, May.
  9. Joshua Angrist & Alan B. Krueger, 2001. "Instrumental Variables and the Search for Identification: From Supply and Demand to Natural Experiments," NBER Working Papers 8456, National Bureau of Economic Research, Inc.
  10. King, Robert G & Rebelo, Sergio, 1990. "Public Policy and Economic Growth: Developing Neoclassical Implications," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages S126-50, October.
  11. Peter H. Lindert, 2003. "Why the Welfare State Looks Like a Free Lunch," NBER Working Papers 9869, National Bureau of Economic Research, Inc.
  12. Maddala, G S & Wu, Shaowen, 1999. " A Comparative Study of Unit Root Tests with Panel Data and a New Simple Test," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 61(0), pages 631-52, Special I.
  13. Davidson, Russell & MacKinnon, James G., 1993. "Estimation and Inference in Econometrics," OUP Catalogue, Oxford University Press, number 9780195060119, March.
  14. Grier, Kevin B. & Tullock, Gordon, 1989. "An empirical analysis of cross-national economic growth, 1951-1980," Journal of Monetary Economics, Elsevier, vol. 24(2), pages 259-276, September.
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