The efficiency of social public expenditure in European countries: a two-stage analysis

ABSTRACT

Do European countries differ in the efficiency of their welfare policies? And which factors can account for such variability? To address these questions, we perform a two-stage efficiency analysis. First, based on a composite output indicator for social protection expenditure, we measure efficiency by means of the Free Disposable Hull and Data Envelopment Analysis techniques. Second, we perform an econometric analysis to identify the factors that can be associated to cross-country differences. We find that countries scoring higher efficiency have higher education and GDP levels, a smaller population size, a lower degree of selectivity of their welfare systems and a lower corruption level.

KEYWORDS:

• Social expenditure efficiency
• free disposable hull
• data envelopment analysis
• non-discretionary factors

JEL CLASSIFICATION:

• H11
• H53
• I3

Acknowledgement

We thank the Editor and the Referees for helpful comments and suggestions.

Disclosure statement

No potential conflict of interest was reported by the authors.

Databases

Eurostat, Social Protection Benefits Data available at http://ec.europa.eu/eurostat/tgm/table.do?tab=table&init=1&plugin=1&language=en&pcode=tps00107

OECD, Social Expenditure Database (SOCX) available at http://www.oecd.org/social/expenditure.htm

OECD, Family Database available at http://www.oecd.org/els/family/database.htm

OECD, Tax-benefit calculator available at http://www.oecd.org/social/soc/benefitsandwagestax-benefitcalculator.htm

OECD, Unemployment Data available at https://data.oecd.org/unemp/harmonised-unemployment-rate-hur.htm

OECD, Pensions at Glance- Pensions Statistics available at http://www.oecd-ilibrary.org/social-issues-migration-health/data/oecd-pensions-statistics/pensions-at-a-glance-2

OECD, Benefits and wages statistics available at http://www.oecd.org/els/benefits-and-wages-statistics.htm

OECD, Income Distribution and Poverty Database available at http://stats.oecd.org/Index.aspx?DataSetCode=IDD

Notes

¹ The expenditures sectors are those included in the OECD SOCX database.

² The SOCX database provides data on net social expenditure for 24 European countries (Austria, Belgium, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Italy, Luxembourg, Netherlands, Norway, Poland, Portugal, Slovak Republic, Slovenia, Spain, Sweden, Switzerland, United Kingdom). Cross-national efficiency comparisons require homogeneity in the economic and socio-demographic structure (Herrera and Pang 2005). We thus exclude Switzerland, which is not a member of the European Economic Area, and Iceland, which has both population and population density much lower than those of the countries under consideration.

³ We use the most recent available data when the 2013 data are missing. See Table 1 and Figures 1 and 2 for details.

⁴ For example, more incisive policies in support of families or unemployed also contribute to reduce poverty and income inequality.

⁵ In the three types of general, female and youth unemployment rate.

⁶ We consider different labour income levels. See Appendix.

⁷ See Appendix.

⁸ As for the methodology used in the calculation of the Human Development Indices. See note 11.

⁹ The OECD ‘Income distribution and poverty’ database refers to the ‘equivalised disposable household income’, that is, household income net of taxes and inclusive of transfers received adjusted for household composition based on equivalence scales.

¹⁰ Methodological notes are available at the following link: http://hdr.undp.org/en/content/calculating-indices.

¹¹ To ensure that the highest values of the index are representative of the best performances, we transform three variables: the unemployment rate, the poverty index and the Gini index. In these cases, higher values of the index would indicate worse – and not better – performances for the country concerned. We therefore consider the complement to one of the preceding three outcome variables interpretable as the employment rate, a ‘welfare index’ (representative of the percentage of households with disposable income of over 60% of the median disposable income) and an index of equidistribution of disposable income, respectively.

¹² We give equal weight to each sector indicator in compiling the aggregate performance indicator; the assumption is strong, but stronger alternatives are lacking. It facilitates the comparison with the existing literature, where either the same assumption is made (Afonso et al., 2005) or some sectors are not considered at all (thus being assigned a zero weight).

¹³ Also, given the difficulties in cross-country data comparability and in separating the effect of public expenditure from that of other factors (just take life expectancy as an example), all the results are indicative. Moreover, the 22 countries have different levels of private social expenditure; these are limited in general, albeit higher in the Nordic countries.

¹⁴ Czech Republic, Estonia, Greece, Hungary, Poland, Portugal, Slovak Republic, Slovenia, Spain and United Kingdom.

¹⁵ Following Afonso et al. (2005), declining marginal productivity of social public expenditure would imply$\frac{{\mathrm{\partial }}^{2}SPP{I}_i}{\mathrm{\partial }NPS{E^2}_i}<0$.

¹⁶ The Free Disposal Hull (FDH) method was first developed by Deprins, Simar, and Tulkens (1984). The Data Envelopment Analysis (DEA) was originated by Farrell (1957) and revised by Charnes, Cooper, and Rhodes (1978). One limit of the method is that it does not statistically assess differences across countries.

¹⁷ The problem in an input-oriented specification for variable returns to scale as by Charnes, Cooper, and Rhodes (1978).

¹⁸ Efficiency scores are computed based on the absolute values of net public social expenditure, PPP U.S. dollars (average 2009–2013).

¹⁹ Note that countries on the frontier are efficient in a relative sense, since no other country obtains a higher performance with a lower expenditure level. This might underestimate inefficiencies.

²⁰ The same considerations apply to the DEA scores.

²¹ As in Afonso et al. (2005; 2010).

²² Results do not change qualitatively by using output efficiency scores and/or the DEA method.

²³ Alesina and Wacziarg (1998) find that country size is negatively related to government size as far as the provision of non-rival public goods is concerned, but that this relationship does not apply to transfers.

²⁴ United Kingdom, France, Germany, Spain, Italy, Poland.

²⁵ To our knowledge, no selectivity index is available in the databases or in surveys data.

²⁶ We have chosen secondary education rather than tertiary education because of the high correlation of the latter with GDP (+ 0.58).

²⁷ However, the introduction of trade openness affects the size and significance level of the coefficient. This result suggests exploring the relationship between international openness and the degree of selectivity of the welfare systems.

²⁸ [Diversion of Public funds/GDP per capita] *1000. Source: Global Competitiveness Index (variable 1.03) for Diversion of Public Funds (http://reports.weforum.org/global-competitiveness-report-2015-2016/).

²⁹ Of course, given the difficulties in cross-country data comparability and in separating the effect of public expenditure from that of other factors (just take life expectancy as an example), all the results are indicative. Also, the 22 countries have different levels of private social expenditure; these are limited in general, albeit higher in the Nordic countries.

³⁰ Except for ‘disabled’.