Work incentives or dependency? Employment effects of social assistance policies in OECD countries

Social assistance policies targeting unemployment constitute one of the core policy areas of welfare states, which are required to simultaneously pursue social protection and labour market objectives. While these policies aim to compensate for income losses by protecting individuals against unemployment risks, they also raise the critical question of whether they encourage labour market participation or instead generate dependency. In particular, concerns that social assistance may discourage job search efforts or delay re-entry into employment have made it necessary to empirically examine the effectiveness of such policies. This study investigates the long-run effects of unemployment-related social expenditures on employment in 33 OECD countries over the period 2000–2021. The analysis first tests for cross-sectional dependence in order to account for interdependence among countries. Subsequently, the stationarity properties of the variables are examined using the CIPS panel unit root test, which explicitly incorporates cross-sectional dependence. The existence of a long-run relationship among the variables is analyzed using the Gengenbach–Urbain–Westerlund (GUW) cointegration test, and long-run coefficients are estimated by means of the Augmented Mean Group (AMG) estimator. This methodological framework allows for heterogeneous long-run relationships across countries. The results for the full panel indicate that unemployment-related social expenditures have a negative and statistically significant long-run effect on employment. The estimated long-run coefficient of social expenditures (-2.199) suggests that the dependency hypothesis is dominant across OECD countries.