The Welfare State and Economic Growth – Econometric Evidence from Germany

Authors

  • Richard Reichel FOM University of Applied Sciences, University of Erlangen-Nuremberg

Keywords:

Welfare State, social spending, economic growth, vector error correction model, Granger causality

Abstract

The growth effects of modern welfare states with relatively high shares of gross domestic product for spending on pensions, health, unemployment and other social security systems has been intensively discussed in the literature, both theoretically as well as from an empirical viewpoint. Clear-cut empirical evidence, however, is still missing. This paper attempts to uncover the growth effects of social spending in Germany within a time series framework. A vector error correction model is estimated for the time period 1960-2019 . The results indicate strong negative long-run growth effects of welfare spending with Granger-causality running from spending to growth. In the short-run the same inverse relationship is found. However, the direction of causality is reversed. As growth rates decline, welfare spending increases.

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Published

2022-06-28

Issue

Section

Forthcoming