The Impact of Entitlement Programs on Employment and Its Interaction with Social Heterogeneity in OECD Countries: An Empirical Study Based on a Dynamic Panel Model

Abstract

Using a Dynamic Panel Model and two estimators: Arellano-Bond Estimator and Arellano-Bover/Blundell-Bond System Estimator, this paper provides empirical evidence to support the hypothesis that expenditure on entitlement programs increases voluntary and involuntary unemployment, and decreases labor participation and investment rate. For the impacts on employment rate and unemployment rate; welfare spending is found to have interaction with the Ethnic Fractionalization Index; supporting the hypothesis that higher social heterogeneity in terms of ethnic, racial, language, and cultural backgrounds may strengthen the effects of entitlement programs on employment. However, this interaction effect is not present in Nordic countries, possibly due to the low social heterogeneity in these countries, which suggests that the seemingly successful Nordic Model may not be copied in other developed countries with higher social heterogeneity.

Keywords: Dynamic Panel Model, Arellano-Bond Estimator, Arellano-Bover/Blundell-Bond System Estimator, entitlement programs, welfare expenditure, Ethnic Fractionalization Index, Nordic Model

JEL Classification: H53, I38