Social investment, labour market participation and public debt sustainability: An empirical analysis of European countries

Abstract

AbstractThis article explores the role of SI Stock, Flow and Buffer policies by shedding light on their relationships with active labour market participation and public debt sustainability for a panel of 22 European countries from 1997 to 2018. We find SI Stock, Flow and Buffer to be positively correlated with labour market participation and more sustainable public debt. When disaggregating the components of SI, we detect a small degree of heterogeneity, with Active Labour Market Policies (ALMPs) negatively associated with the activity rate and positively associated with the employment rate. This result is coherent with the idea that ALMPs make a significant contribution to increasing opportunities for those already in the labour market rather than creating new jobs for those excluded from the labour market, that is, inactive individuals. In this case, our findings indicate that measures to fight social exclusion and out‐of‐work expenditure (Buffer), as well as in‐kind family benefits, are significantly associated with employability for those excluded from the labour market.