Economic growth and welfare state: a debate of econometrics

This study econometrically tests 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. The policy implication of this study is: Because working time is negatively related to generosity of welfare programs and entitlement society has institutional rigidity, comparing with developed countries with low welfare level, generous welfare states have a trend of decreasing lifetime working time, which leads to a trend of rising proportion of retirees in the population, which leads to a trend of rising pension benefit expenditure as percentage of GDP, which slows down economic growth (through inhibiting investment rate and productivity growth), which in the end makes the financing of welfare expenditure unsustainable. To prevent such a crisis, introducing more immigrants, particularly skillful immigrants is a feasible way to deter population ageing, slowing down of economy and eruption of sovereign debt crisis or fiscal crisis in the long run