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The determinants of social expenditures in OECD countries

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Abstract

Many theories have been proposed to explain why social expenditures have increased in industrialized countries. The determinants include globalization, political–institutional variables such as government ideology and electoral motives, demographic change, and economic variables, such as unemployment. Scholars have modeled social expenditures as the dependent variable in many empirical studies. We employ extreme bounds analysis and Bayesian model averaging to examine robust predictors of social expenditures. Our sample contains 31 OECD countries over the period between 1980 and 2016. The results suggest that trade globalization, the fractionalization of the party system, and fiscal balances are negatively associated with social expenditures. Unemployment, population aging, banking crises, social globalization, and public debt enter positively. Moreover, social expenditures have increased under left-wing governments when de facto trade globalization was prominent, and at the time of banking crises. We conclude that policymakers in individual countries rely on domestic conditions to craft social policies—globalization, aging, and business cycles notwithstanding.

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Source OECD

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Notes

  1. Public social expenditure consists of cash and in-kind benefits for old age, survivors, disability, health, family, active labor market programs, unemployment, housing, and other social policies.

  2. https://www.oecd.org/social/soc/OECD2019-Social-Expenditure-Update.pdf (accessed on 31 July 2019).

  3. Duval et al. (2021) examine robust predictors of structural reforms.

  4. Egger et al. (2019) find that during globalization, higher levels of public expenditures are financed by a smaller range of tax bases, such as middle class labor income.

  5. Gözgör et al. (2019) show that increased economic globalization is associated with lower public employment.

  6. Cameron (1978) hypothesized that countries that are more open are also more heavily unionized, which, increases social spending through collective bargaining. Rodrik (1998) showed that the correlation between openness and social spending is also found in developing countries with low levels of unionization. Social spending serves as a form of insurance against uncertainty and risks related to openness. Bergh (2021) proposes a revised compensation hypothesis.

  7. For the link between globalization and the size of government, see also Alesina and Wacziarg (1998) and Epifani and Gancia (2009).

  8. Colantone et al. (2019) show, for example, how import competition induces mental distress in workers.

  9. On the other hand, theories propose that public expenditures are not likely to be higher under minority than majority governments because minority governments are expected to be strong and stable when they consist of one large, centrally located party (Crombez 1996; Tsebelis 2002). The size of the government may be even smaller under minority governments because minority governments can choose among various potential partners, and select the least costly alternative.

  10. Fiscal rules govern the way in which budgets are drafted by the government, amended and passed by the parliament, and then implemented by the government.

  11. Of the 38 OECD countries, we exclude Chile, Colombia, Costa Rica, Israel, Korea, Mexico, and Turkey because data for some explanatory variables is not available for those countries. The data can be accessed here: https://www.oecd.org/social/expenditure.htm.

  12. It includes public spending on early childhood education and care for children under the age of six, but excludes public spending on education beyond that age.

  13. In Ireland, GDP (the denominator) increased by 25% in 2015, following the relocation of a small number of multinationals’ intellectual property assets to Ireland. In the Netherlands, the health care reform of 2006 relocated basic health insurance finance to private funds, which decreased public social spending.

  14. The fractionalization of the party system is measured in the way that Rae (1968) proposed: \(fract=1-{\sum }_{i=1}^{m}{s}_{i}^{2}\), where s is the share of seats for party i, and m is the number of parties (the legislative fractionalization).

  15. Inferences do not change when we measure political institutions using data provided by Gründler and Krieger (2016, 2018) and Bjørnskov and Rode (2020).

  16. Parts of this section rely upon previous works, such as Hartwig and Sturm (2014), Moser and Sturm (2011), Sturm and Williams (2010), and Dreher et al., (2009a, b).

  17. For simplicity, this term is used for the distribution on both sides of zero, that is for CDF(0) and 1-CDF(0). Sala-i-Martin (1997) proposes using the (integrated) likelihood to construct a weighted CDF(0). However, due to missing observations, the varying number of them in the regressions in some of the variables poses a problem. Sturm and de Haan (2001) show that this goodness-of-fit measure may not be a good indicator of the probability that a model is the true model, and the weights constructed in this way are not equivariant to linear transformations in the dependent variable. Hence, changing scales result in rather different outcomes and conclusions. Thus, we restrict our attention to the unweighted version.

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Acknowledgements

We are grateful to Dirk Foremny, Regina Pleninger, Anna Raute, Cameron Shelton, the participants and discussants at the IIPF in Glasgow 2019, the virtual EEA 2020, the EPCS in Braga 2022, and the anonymous reviewers for helpful comments and suggestions. The usual disclaimer applies.

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Authors and Affiliations

  1. KOF Swiss Economic Institute, ETH Zurich, Leonhardstrasse 21, 8092, Zurich, Switzerland

    Florian Haelg & Jan-Egbert Sturm

  2. ifo Institute, Munich, Germany

    Niklas Potrafke

  3. University of Munich, Munich, Germany

    Niklas Potrafke

  4. CESifo Munich, Munich, Germany

    Jan-Egbert Sturm

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  1. Florian Haelg
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Correspondence to Florian Haelg.

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Haelg, F., Potrafke, N. & Sturm, JE. The determinants of social expenditures in OECD countries. Public Choice 193, 233–261 (2022). https://doi.org/10.1007/s11127-022-00984-4

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