The effects of public transfers on productivity

This paper attempts to establish empirically the effects of transfers to household on labour productivity growth. In particular, I investigate the effects of health and social security expenditure on the rate of growth of GDP per labour units in 19 sectors and 13 OECD countries in the period 1976-2000. The main result is that transfers such as health expenditure and social security spending have positive and significant effects on labour productivity in the sectors that require low skilled workers, such as manufacturing of non-durable goods, energy supply, construction and services. This research shows that these results could be due to a "risk insuring" mechanism: employees with low wages (on average low skilled and high labour intensive jobs are less paid than high tech ones) find in higher government spending a guarantee of safety and wellbeing, otherwise difficult to achieve with their own resources. Moreover the increased security allows them to divert resources towards higher saving and investment in education. These results are consistent with the assumption that fiscal variables affect growth by means of total factor productivity and robust to the test of a possible spurious correlation between public transfers and growth, due to openness to trade.