The Efficiency and Employment Enhancing Effects of Social Welfare

Conventional economic modelling of social welfare predicts that welfare payments will have unequivocal negative effects upon the economy in terms of labor supply, production costs, and employment. However, the conventional model is built upon assumptions that are too restrictive given the questions being addressed. This paper addresses the economic impact of the welfare payments from an alternative and more realistic analytical framework. The target income approach is used to analyze the potential labor supply effects of welfare payments and a behavioral model is used to analyze what impact it has on labor and production costs. Labor supply can be expected to fall only for those with very low real income target incomes and for those with earning capacities below the target income. Increasing labor costs induced by welfare payments cannot be expected to increase unit production costs where increasing labor costs are expected to generate increases in the level of efficiency and technology change. In these circumstances, welfare serves to improve the overall level of material well-being in society by provoking higher levels of efficiency and higher rates of technical change.Such alternative modeling suggests that the conventional analysis of welfare can be highly misleading, generating policy recommendations that have "welfare" reducing effects on the economy as a whole, especially upon the lowest income cohort of an affected population