Is government’s help for unemployed people helpful for the society? An Empirical Study on Macro Data of Public Unemployment Spending in OECD Nations

Using panel data of public unemployment expenditure as a percentage of GDP of 34 OECD nations across year 1980-2010, I explore the effect of this ratio on three unemployment outcomes: total unemployment rate, long-term unemployment rate and youth unemployment, as well as labor participation rate and investment rate. After taking into account potential endogeneity of this ratio using Durbin-Wu-Hausman test, I find the data does not support the hypothesized aggregate demand effect of unemployment insurance (UI) expenditure in theory but gives strong support for hypothesized disincentive effect in theory. The estimates indicate that every percentage point increase in public unemployment welfare expenditure relative to GDP leads to 0.9 to 1.1 percentage point increase in total unemployment rate and 4.5 to 4.7 percentage point increase in long term unemployment rate. The distortionary effect of UI program on business is also verified by an estimate that every percentage point increase in this unemployment spending rate is associated with about 2.1 percentage point decrease in investment rate.