Education and health: welfare state composition and growth across country groups

When analysing the Welfare State-economic growth nexus, the importance of health and education expenditures and their impact on human capital accumulation is often neglected. In this study, we claim that the Welfare State composition matters for growth, making it necessary to assess the impact of education and health (public) expenditures on educational attainment and health status, as well as their effect on the real output across countries. To better account for the influence of differences across countries we consider three groups over the period 1960-2012: high income (non-EU) OECD countries, the EU member states before the 2004 enlargement and the EU enlargement (2004 and 2007) new member states. The contribution of the study is twofold. First, we identify long-run relationships for the main variables using the DOLS estimator corrected for cross-sectional dependence. Secondly, we estimate short-run relationships that include an ECM term from the associated long-run equation by applying fixed effects and pooled mean group estimators and identify the direction of causality. The results of the estimation of the long-run equilibrium relationships point to a positive, direct or indirect, influence of (public) education expenditures and (public, private or total) health expenditures on the output in all the groups. However, causality analysis presented mixed results concerning our policy variables, education and health expenditures, within and between country groups. These results can have important implications for Welfare State policy design in the EU and its OECD partners. For the high-income OECD (non EU) group, the results unequivocally support the use of social policy variables as a means to foster economic growth. However, for both EU country groups, educational and health expenditures react to disequilibrium relative to the long-run equilibrium path, so that they are endogenously determined with output, which undermines their use as growth enhancing policies.