Do Social Policies Harm Employment and Growth?

Abstract

In economies with competitive labour markets social policies harm employment and output. In Europe, in particular, non-competitive labour markets with trade unions, efficiency wages and/or costly search and mismatch seem more realistic. Social policies such as progressive taxation or facilitating corporatism may well induce wage moderation and boost employment and output. Although unconditional unemployment benefits destroy jobs, conditional benefits may spur job growth. In a second-best world usual effects of social policies are thus overturned. In addition, the incidence of taxation and the effects of tax progressivity depend crucially on the specific features of the welfare state, e.g., whether benefits are indexed to wages or not. In a full political-economic equilibrium a more equitable distribution of income and assets leads to a median voter who is better off and thus votes for less 'populist' policies. Hence, employment and economic growth will be higher and inflation lower. In general the supremacy of 'laisser faire' is questioned also by international comparisons.

Keywords: Social Policies, Conditional Unemployment Benefits, Non-competitive Labour Markets, Employment, Growth, Politics

JEL Classification: E6, H0, J0, O4