Will the provision of welfare programs hinder economic growth (measured in GDP terms) through voluntarily unemployment and structural unemployment it may cause?



Introduction1

Discussion2

Economic Growth2

Economic Growth and Welfare Provisions in Europe4

Welfare States in Europe7

Nordic and Dutch Welfare States10

Employment and Long-Term Unemployment12

Types of Unemployment13

Conclusion14

Reference16

Will the provision of welfare programs hinder economic growth (measured in GDP terms) through voluntarily unemployment and structural unemployment it may cause?

Introduction

Pontusson (2005) states that post WW-II Western Europe witnessed a swift expansion of government spending on different programs of social welfare. Reforms to lay the foundation of these post welfare states were critically contributed by close ties between labor movements and political parties of the left; however, these reforms were quickly embraced by conservatives, liberals and Christian Democrats. Pontusson (2005) claims that income is redistributed by public provisions for social welfare, in favor of low income earners and the poor; however, there is no proven evidence to the fact that social welfare provisions can hamper the process of economic growth. On the contrary, Mitchell (2005) states a negative relationship between economic growth and the size of government. In his view, the very nature of government spending makes it economically destructive, irrespective of its means of financing.

According to Pontusson (2005), economic growth of 1960s and 70s was actually promoted by social spending. He states that there is no proper association between growth of GDP per capita and level of social spending; however, evidences have indicated that sluggish employment growth is being associated with reliance on payroll taxes to finance state programs of welfare. Contrarily, Mitchell (2005) argues that social welfare programs have encouraged people to choose leisure. Given that, government programs of unemployment insurance have encouraged people to remain unemployed, which are one of the negative aspects of welfare provisions, hampering the growth of the economy (Mitchell, 2005).



Discussion

Economic Growth

The term “economic growth” refers to the number of goods and services produced domestically. In other words, it measures increase in per capita GDP, as illustrated by figure 1. Since it is measured as a rate of change in real GDP, it can either be negative or positive, where negative growth in the economy is defined as a shrinking economy (Saylor, 2011).

Figure 1: Major Countries' Real GDP Growth Rates 1990-1998 and 1990-2006 (Saylor, 2011, p. 1)

When comparing per capita income of two countries (figure 2), statistics can be quoted in a single currency based on Purchasing Power Parity (PPP) or prevailing exchange rates (Saylor, 2011). In a given year, GNP or GDP are typically provided in inflation adjusted or real terms in order to compensate changes in the value of money (deflation or inflation). Distinctions between long term economic growth and short term economic stabilization have been drawn by economists that indicate a short term changes in economic growth as the business cycle (Saylor, 2011).

Figure 2: Since 1961, Rate of GDP Change, OECD and World (Saylor, 2011, p. 1)

However, economic growth is more concerned with long term prospects of growth. In-spite of measurement problems, an increase in a country's GDP ...