Social Investment Policy, Economic Growth, and Welfare States: Channels of Pro-Growth Effects of Policy

Abstract

AbstractSocial investment (SI) policies have been popular among industrial countries in the past two decades. Governments hope that SI policies will promote productivity and economic growth by creating high-skill labor forces that can adapt to the imperatives of the new knowledge economy and technological advances, or that can create new technologies themselves. They also hope that SI policies will mitigate new social risks, such as single-parent families and workers in precarious employment by better preparing workers for jobs and promoting social inclusion. However, little research exists that empirically investigates whether or not SI policies really produce these positive outcomes. Of all economic outcomes, this paper focuses on economic growth and the channels of economic growth—multifactor productivity (MFP), physical capital investment, and labor input—and investigates whether SI policies promote growth in GDP and its channels. Data from 17 industrial countries are analyzed. The analysis finds that family support, education, and ALMP spending (all measured as spending per child, student, and an unemployed person, respectively) is positively associated with MFP and GDP growth, and that MFP growth is the main channel through which SI policies enhance GDP growth. Education spending boosts the growth of all of MFP, physical capital stock, labor input, and GDP growth via those channels. While family support does not promote the growth of labor input, the results suggest that larger family support spending leads to higher levels of labor input. Overall, these types of SI spending have generally positive effects on economic growth.