The Impact of Entitlement programs on Employment and Its Interaction with Social Heterogeneity in OECD Countries: an Empirical Study Based on a Dynamic Panel Model

Using a dynamic panel model and two estimators: Arellano-Bond estimator and Arellano-Bover/Blundell-Bond system estimator, this paper provides empirical evidences to support the hypothesis that expenditure on entitlement programs increases voluntary and involuntary unemployment, decreases labor participation rate and investment rate. For the impacts on employment rate and unemployment rate, welfare spending is found to have interaction with ethnic fractionalization index, supporting the hypothesis that higher social heterogeneity in terms of ethnic, racial, language and cultural backgrounds may strengthen the effects of entitlement programs on employment. However, this interaction effect is not present in Nordic countries, possibly due to the low social heterogeneity in these countries, which suggests that seemingly successful Nordic model may not be copied to other developed countries with higher social heterogeneity.