The More, the Better: Life Satisfaction in the Bitter Welfare State

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Abstract The subject of the welfare state is the object of a critical debate in the context of current global economic turmoil. An important issue surrounding this topic is whether people truly thrive in the welfare state or is they better off without it. Recently, there has been a growing interest in measuring the quality of life using subjective well-being indicators in order to complement the perspective offered by objective well-being indicators. These indicators are perceived as being an increasingly important component of human welfare, as they are not only an assessment of a person's life, but can also serve as a means to improve one's life. The objective of this research is to provide empirical evidence for the existence of a positive relationship between social expenditure and life satisfaction. Based on the happiness economics literature, the current paper distinguishes itself by examining the connection between life satisfaction, as a proxy for wellbeing, and social expenditure. The paper contributes by examining the link between well-being and social expenditure components to offer a more holistic view on the subject at hand. Given the structure of the data, a dynamic panel data model with “small T, large N”, we involve a GMM methodological framework. We use this approach mainly because estimators like random and fixed effects, or even standard GMM, may turn up biased results. We use a two-step expanded system estimator (System GMM) which features a set of supplementary restrictions applied to the already existing ones in the process generating the dependent variable. We use a dataset of 21 European countries covering a time span between 2004 and 2011.