The Welfare State has come under
attack from economists, particularly in
Western Europe, who argue that it is responsible
for poor economic performance,
and that public spending should be reduced.
The present paper seeks to clarify
the nature of the charges leveled against
the We/fare State and the mechanisms by
which it may adversely affect economic
performance. The first section considers
the aggregate empirical evidence. Not
only is the evidence mixed, but also such
an argument is difficult to establish. The
second section of the paper describes a
number of the problems with aggregate
cross-country evidence. In particular, the
interpretation depends on the underlying
theoretical framework. The third and
fourth sections of the paper examine a
selection of the theoretical mechanisms,
distinguishing between those that affect
the level of output, taking a model of the
labor market, and those that influence
the rate of growth, drawing on recent
developments in growth theory. An important
role is played by the institutional
structure of benefits, which can significant/
y change their impact on economic
behavior.
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