Social spending and chronic unemployment: evidence from OECD countries

Abstract

Purpose: Social spending is at the forefront of the tools used to repair the damage caused by the global epidemic. However, one of the most critical questions in recent days is as follows: what are the effects of social expenditures in eliminating unemployment? The primary purpose of this article is to provide empirical evidence on the impact of social spending on chronic unemployment in the selected organization for economic co-operation and development (OECD) countries. Design/methodology/approach: In this study, the data of 30 selected OECD countries between 1991 and 2018 have been compiled. First, countries have been divided into four categories according to their spending intensity to determine the effects of social spending on the long-term unemployment rate. Then, the auto-regressive distributed lag (ARDL) approach and the error correction models (ECM) examine the variables' short- and long-term interactions. Findings: The author found that the change in the share of social expenditures in GDP affects chronic unemployment similarly. This finding is consistent with the results of studies in the literature dealing with the relationship between public sector size and unemployment. However, the research findings are specifically about the effects of social expenditures on chronic unemployment. In this respect, the results reflect that expenditures with passive characteristics have an expansionary effect on long-term unemployment. In addition, the progressive effect of social expenditures on chronic unemployment is increasing in countries with high expenditure intensity. In countries with relatively low spending intensity, the impact of social spending is limited to the short run and is lower. Originality/value: Multiple studies have reported that public policies developed in line with the incentives of active employment and public or private sector investments reduce the unemployment rate by positively affecting the output/employment level. This study, unlike other studies, focuses on the effects of social expenditures on chronic unemployment. It also compares the effects of social spending on the long-term unemployment rate for countries with varying spending intensities. Therefore, this article tests the impact of social expenditures used against a concrete socioeconomic problem in the OECD sample. In this respect, the findings contribute to the literature by addressing the relationship between social spending and chronic unemployment.