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

Author

Listed:
  • 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.

Suggested Citation

  • George C. Bitros & Kyprianos Prodromidis, 2004. "Welfare benefits and the rate of unemployment: some evidence from the European Union in the last thirty years," Macroeconomics 0410004, EconWPA.
  • Handle: RePEc:wpa:wuwpma:0410004
    Note: Type of Document - pdf; pages: 20
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    References listed on IDEAS

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    1. Blanchard, Olivier & Jimeno, Juan F, 1995. "Structural Unemployment: Spain versus Portugal," American Economic Review, American Economic Association, vol. 85(2), pages 212-218, May.
    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. 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.
    4. Lindbeck, Assar, 1995. "Hazardous Welfare-State Dynamics," American Economic Review, American Economic Association, vol. 85(2), pages 9-15, May.
    5. 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.
    6. 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.
    7. Katharine G. Abraham & Susan N. Houseman, 1994. "Does Employment Protection Inhibit Labor Market Flexibility? Lessons from Germany, France, and Belgium," NBER Chapters,in: Social Protection versus Economic Flexibility: Is There a Trade-Off?, pages 59-94 National Bureau of Economic Research, Inc.
    8. Bean, Charles R, 1994. "European Unemployment: A Survey," Journal of Economic Literature, American Economic Association, vol. 32(2), pages 573-619, June.
    9. Siebert, Horst, 1997. "Labor market rigidities and unemployment in Europe," Kiel Working Papers 787, Kiel Institute for the World Economy (IfW).
    10. 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 219-225, May.
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    More about this item

    Keywords

    unemployment rate; welfare benefits; European Union;

    JEL classification:

    • E - Macroeconomics and Monetary Economics

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