The Determinants of Social Protection Expenditures and Labor Market Flexibility

Abstract

The empirical literature on social protection is quite limited. Few studies have examined the determinants of social protection either at the regional or country level. Hong (2014) and Beblavy (2009) examine three East Asian countries and 27 EU states, respectively, while Sepalika et al. (2014) examine Sri Lanka. In this paper we examine the determinants of social protection expenditures in a sample of 54 developed and developing countries focusing on the influence that flexible labor markets exert. Empirical evidence shows that GDP per capita, national administrative capacity, and the extent of the shadow economy increase the share of social protection expenditures. Labor market flexibility, trade openness, fractionalization, and natural resource abundance decrease it on the other hand. This paper improves our understanding of the most important determinants for the degree of social protection, including labor market flexibility. It has strong implications for the design of successful policies by national governments and international organizations and donors.