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

  • DING, HONG

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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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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  1. Ohlsson, H. & Agell, J. & Lindh, T., 1995. "Growth and the Public Sector: A Critical Review Essay," Papers 1995-09, Uppsala - Working Paper Series.
  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).
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  4. Baker, Dean & Glyn, Andrew & Howell, David & Schmitt, John, 2004. "Unemployment and labour market institutions : the failure of the empirical case for deregulation," ILO Working Papers 374124, International Labour Organization.
  5. Atkinson, Anthony B., 1995. "The Welfare State and Economic Performance," National Tax Journal, National Tax Association, vol. 48(2), pages 171-98, June.
  6. Tullio, Giuseppe, 1987. "Long run implications of the increase in taxation and public debt for employment and economic growth in Europe," European Economic Review, Elsevier, vol. 31(3), pages 741-774, April.
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  8. Gabriel J Felbermayr & Julien Prat & Hans-Jörg Schmerer, 2009. "Trade and Unemployment: What do the data say?," Diskussionspapiere aus dem Institut für Volkswirtschaftslehre der Universität Hohenheim 310/2009, Department of Economics, University of Hohenheim, Germany.
  9. Robert J. Barro & Rachel McCleary, 2003. "Religion and Economic Growth," NBER Working Papers 9682, National Bureau of Economic Research, Inc.
  10. Peter Lindert, 2003. "Why The Welfare State Looks Like a Free Lunch," Working Papers 27, University of California, Davis, Department of Economics.
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  12. Lorenzo E Bernal-Verdugo & Davide Furceri & Dominique Guillaume, 2012. "Labor Market Flexibility and Unemployment: New Empirical Evidence of Static and Dynamic Effects," Comparative Economic Studies, Palgrave Macmillan, vol. 54(2), pages 251-273, June.
  13. 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.
  14. Howell David R. & Baker Dean & Glyn Andrew & Schmitt John, 2007. "Are Protective Labor Market Institutions at the Root of Unemployment? A Critical Review of the Evidence," Capitalism and Society, De Gruyter, vol. 2(1), pages 1-73, May.
  15. Davidson, Russell & MacKinnon, James G., 1993. "Estimation and Inference in Econometrics," OUP Catalogue, Oxford University Press, number 9780195060119, May.
  16. Joshua D. Angrist & Alan B. Krueger, 2001. "Instrumental Variables and the Search for Identification: From Supply and Demand to Natural Experiments," Journal of Economic Perspectives, American Economic Association, vol. 15(4), pages 69-85, Fall.
  17. Ljungqvist, Lars & Sargent, Thomas J, 1995. "Welfare States and Unemployment," Economic Theory, Society for the Advancement of Economic Theory (SAET), vol. 6(1), pages 143-60, June.
  18. Jeffrey M Wooldridge, 2010. "Econometric Analysis of Cross Section and Panel Data," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262232588, March.
  19. Alesina, Alberto & Perotti, Roberto, 1997. "The Welfare State and Competitiveness," American Economic Review, American Economic Association, vol. 87(5), pages 921-39, December.
  20. Heckman James J., 2007. "Comments on Are Protective Labor Market Institutions at the Root of Unemployment? A Critical Review of the Evidence by David Howell, Dean Baker, Andrew Glyn, and John Schmitt," Capitalism and Society, De Gruyter, vol. 2(1), pages 1-5, August.
  21. 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- An International and Interdisciplinary Journal for Quality-of-Life Measurement, Springer, vol. 50(2), pages 115-157, May.
  22. 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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