Welfare benefits and the rate of unemployment: some evidence from the European Union in the last thirty years

Our objective in this paper is to re-examine the hypothesis that welfare benefits may be responsi-ble for the observed differences in cross- country unemployment rates and test its validity by using panel data from 19 countries over the 1970-2000 period. For this purpose, we set up a general equi-librium model encompassing the private and public sectors of the economy, where the government comes to the relief of the unemployed by increasing the welfare benefits per man. From this model, we extract an unemployment rate equation. The results that emerge from the empirical analysis sug-gest that social benefits per man may indeed adversely influence the rate of unemployment in EU-15. But the results change significantly when the EU member states are classified as high-, low- and average unemployment countries. In particular, we find that, whereas unemployment benefits exert perceptible positive influences in the high and average unemployment sub-groups, their influence in the low unemployment sub-group is nil. This finding, in conjunction with the evi-dence that the unemployment rate is invariant with respect to social benefits in USA and Canada, leads us to the conclusion that some EU countries may have to restructure their welfare systems, so as to reduce welfare benefits in favour of greater labour market flexibility and self-reliance on the part of workers.