Stabilization Effects of Social Spending: Empirical Evidence from a Panel of OECD Countries

Abstract

The aim of this paper is to assess the ability of social spending to smooth output shocks and to provide stabilization. The results show that overall social spending is able to smooth about 15 percent of a shock to GDP. Among its sub-categories, social spending devoted to Old Age, Health and Unemployment are those that contribute more to provide smoothing. Moreover, the stabilization effects of social spending are significantly larger in those countries where the size of social spending is higher, and in countries in which social spending is less volatile. The empirical results are economically and statistically significant, and robust.