Government Intervention in OECD Member Countries: Equity at the Expense of Efficiency?

Abstract

This article examines the presumption that equity considerations prevalent in some of the so‐called welfare states of Organisation for Economic Co‐operation and Development (OECD), and associated with substantial government intervention in the economy, come at the expense of economic efficiency. To verify this presumption, the article selects the OECD’s five highest spending countries, in terms of government expenditure as a percentage of gross domestic product, as well as the five lowest spending countries in the OECD’s upper median income group. The performance of eight economic indicators, representative of both equity considerations and economic efficiency, is then evaluated with respect to each group of countries. The article concludes that while high‐spending countries largely outperform low‐spending countries with regard to equity considerations (such as a more equal income distribution, lower child poverty rate and more generous social benefits), evidence of greater economic efficiency by the low‐spending countries is not apparent, with productivity and inflation rates being even between the two groups, and difference in unemployment rates being challenged by the large incidence of part‐time and casual employment in low‐spending countries.