Social Investment Policy, Economic Growth, and Welfare States: Channels of Growth Effects of Policy

Social investment policies have been prominent on the European Union’s policy agenda. Other advanced industrial countries outside Europe also pursue those policies, though to a lesser extent. Governments hope that those policies will promote productivity and economic growth by creating high-skilled labor forces that can adapt to the imperatives of the new knowledge economy and technological advances, or that can create new technologies themselves. The policies are also hoped to address new social risks, such as single-parent families and workers in unstable, precarious employment. While there is some literature that studies the nature and origin of social investment policies, there are few studies that investigate the effects of those policies. This paper examines whether social investment policies actually bring about the economic benefits that their proponents hope such policies will bring, by analyzing their effects on economic growth and the channels of economic growth—physical capital investment, labor input (employment), and multifactor productivity (roughly technological progress). I will show whether social investment policies promote economic growth, how they affect the individual channels of growth, and through which channels of economic growth those policies affect economic growth. The empirical analysis uses time-series cross-national data from OECD countries between 1985 and 2010. I examine four dependent variables—real per capita GDP growth, growth in physical capital stock, growth in labor input (labor utilization, i.e., total hours worked), and multifactor productivity growth. Social investment policies that I analyze as independent variables are—education spending, family support spending, active labor market policy spending, and some forms of redistribution. Government R&D spending is also included as one of the control variables. Empirical analysis is still in progress. But preliminary results tentatively suggest that the data are largely consistent with the theoretical expectations. I am now conducting robustness check, as endogeneity concerns need to be taken seriously, as with some other methodological concerns. If it turns out that social investment policies do affect economic growth and its components, it will mean that politics affect the performance of the national economy in an important way, because different welfare states (or partisan governments or welfare production regimes) implement distinct social investment policies. And different governments create distinct social investment policies, because they have different constituencies, economic coalitions, economic growth strategies and they operate under different institutional and/or historical environments, including electoral system and labor relations. It may also mean that different clusters of welfare states have divergent (but similar within clusters) paths to economic growth. If such is the case, it will mean that welfare states not only affect the well-being of their citizens, but also shape the wealth of their countries. If so, countries can possess a certain degree of control over their economic and social fate, if they want to.