Economic Growth and Welfare State: A Debate of Econometrics

Abstract:     
This study econometrically test the impacts on economic growth of public social expenditure and its four major components: income support, pension benefits, public health and other social services. I use a two-way fixed effect model for panel data of all OECD nations, which includes most of the determinants of growth in previous growth empirical studies for either cross section or panel data as control variables and check possible endogeneity of the variables of interest: welfare measures by Durbin-Wu-Hausman test. The empirical analysis shows a robust negative correlation between welfare spending rate, pension spending rate and GDP growth with substantial policy effects. The policy implication of this study is: Despite possible positive impact from some sub-components of government welfare expenditures on social services other than public health, overall the total government public social expenditure has a negative effect on economic growth. The main source of this impact is pension spending rate, which has a self-reinforcing effect. The self-reinforced rising pension spending rate slows down economic growth (through inhibiting investment rate and productivity growth), which in the end will make the financing of welfare expenditure unsustainable. To prevent such a crisis, introducing more working-age immigrants, particularly skillful immigrants is a feasible way to deter population ageing, slowing down of economy and eruption of sovereign debt crisis in the long run.

Number of Pages in PDF File: 51

Keywords: welfare state, economic growth, endogeneity, Durbin-Wu-Hausman test, pension expenditure, population ageing

JEL Classification: H2, H53

working papers series