We examine the relationship between welfare state policies and economic performance in a small open economy with (i) free trade in final goods and international capital mobility, and (ii) aggregate increasing returns to scale. Contrary to the conventional wisdom, we find that a retrenchment of...

We construct a stylised model of the supply side with goods and labour market imperfections to show that an economy can rationally operate at an inefficient, or ‘low-effort’, state in which the relationship between output and unemployment is positive. We examine data from the G7 countries...