This paper empirically investigates the effects of pensions and social services
on employment and economic growth. Social expenditure consists of various
components, including pensions, public assistances, health insurances, social
services, and active labor market polices, each of which can have different
effects on employment and economic growth. Furthermore countries differ in
the level and composition of social expenditure due to different needs and
history. Our empirical analysis shows that pensions have a negative effect on
employment while social services a positive effect. A one standard deviation
increase in pensions decreases employment by 1.86%p~2.97%p, and a one
standard deviation increase in social services increases employment by
1.65%p~2.97%p. We also find that the effects of pensions and social services
on economic growth are not significant. From the results of our estimations,
we conjecture that the high employment in Northern European Countries is
associated with their welfare policy focused on social services. A natural policy
implication of our findings is that social services should be the key component
of social expenditure to expand employment opportunities in the process of
de-industrialization.