NCPA - National Center for Policy Analysis

Cost of Social Welfare

November 4, 1997

Last year, Nobel prize-winning economist Gary Becker estimated that about half of average labor costs in France and Germany are taxes to fund welfare state programs -- social security, unemployment insurance, as well as disability, health and other taxes on labor.

High labor costs are the reason much of Europe stumbles along with extraordinarily high rates of unemployment.

  • According to Union Bank of Switzerland figures, the lost output of unemployed workers amounts to nearly 14 percent of national income in Spain, 7.5 percent of income in France and nearly 5 percent in Belgium and Germany.
  • Domestic output and income also decline when firms shift production to lower-cost foreign locations, when workers move into the underground economy, and when tax avoidance becomes widespread -- all to escape the voracious appetite for revenues common among social welfare economies.

However, leaders in the Netherlands have been able to halve the unemployment rate since it peaked in 1984.

  • Experts say they did it by allowing the minimum wage to fall relative to the average wage.
  • The government has tightened eligibility for unemployment, sickness and disability benefits.
  • Also, taxes were cut and rigid labor rules were relaxed.

Taxes seem to be the key, in the opinion of many economists. In 1996, Hudson Institute economist Alan Reynolds conducted a survey of dozens of nations. He found that those that cut taxes in the 1980s enjoyed a four times greater rate of growth than those which didn't.

Source: Perspective, "Europe's Medicine," Investor's Business Daily, November 4, 1997.


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