Social expenditure composition, welfare models and standards of living across the OECD

Abstract

Do comprehensive welfare state arrangements increase standards of living? The pandemic has called for and made more admissible bigger governments but the contention not long ago was that the welfare state undermines productivity and efficiency and in this way standards of living. In this study we investigate whether the totality and specific components of the welfare state result in higher standards of living in a sample of thirty-four OECD countries observed over the period 1980–2018 and grouped according to a taxonomy of welfare state regimes. We account for the size and composition of the welfare state using data on social expenditure, total and according to ten areas of intervention, while standards of living are measured as real GDP per capita, still the most widely used indicator for cross-country comparisons. The evidence found confirms that the composition of social expenditure matters for the improvement of standards of living across countries and over time, as well as the institutional arrangements associated with varied welfare state regimes, highlighting also differences in the time it takes for specific social policies to be able to improve standards of living. Overall, our results are more consistent for active labour market policies suggesting that this type of social spending is able to improve standards of living both in the medium and long-term and across welfare state regimes.