Empirical Analysis of Fiscal Soundness and Public Social Expenditure: A Lesson for the Future Direction of the Korean Welfare State

Abstract

The purpose of this study was to examine the effectiveness of an employment?oriented welfare state. While previous studies have focused on employment growth, this study considers the quality of employment, especially its mediating impact between public social expenditure and fiscal soundness. Three?step mediated regression analysis was conducted on a data sample from 19 developed countries from 1991 to 2013. The results show that while public social expenditure negatively affects fiscal soundness, if it promotes total and part?time employment, it can positively affect fiscal soundness. However, when the incidence of involuntary part?time employment is high, public social expenditure and its impact on employment performance no longer guarantee fiscal soundness. This study addresses the importance of promoting not only employment growth but also employment quality to secure fiscal soundness. The aim of this paper is to investigate the relations between fiscal soundness and public socialexpenditure in advanced welfare states so as to reconsider the conventional wisdom that welfareexpenditure aggravates national finances. Through this, I propose the clues of building the sustainableKorean welfare state. I focus on the interdependent relationship between fiscal soundness andpublic social expenditure based on fiscal sociology. Considering this interaction, I form two sets ofsimultaneous equations models and employ a special statistical method, three-stage least squares(3SLS). The results regarding the causal relationship between fiscal soundness and public socialspending indicate that, if public welfare spending is increased, fiscal health is damaged. However,as many comparative social policy researchers have pointed out, outcomes of welfare states differfrom country to country according to the composition of public welfare spending. Specifically,some welfare states with priority given to social services such as vocational training or childcareservices have maintained the stability of public finance. By extension, we can say that public socialexpenditures have a positive influence on fiscal soundness based on the composition of socialexpenditures. Finally, it is possible to create financially sustainable welfare states.