Abstract and Keywords
This article reports the studies that have examined the consequence of larger welfare states on two macroeconomic outcomes: growth and employment. It also reviews research on advanced industrialized economies. A literature of more recent origin is presented, which explores the employment consequences of larger programmes in developing economies. Social programmes provide important economic externalities that outweigh the potential distortions resulting from higher taxes. Other social programmes can also create positive externalities to economic actors and affect long-term growth trajectories. It is shown that wage bargaining institutions mediate the effects of larger welfare states on employment. Highly centralized wage bargaining systems create powerful incentives for the wage moderation for labour unions.
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