Social Sciences in China (Chinese Edition)

No.1, 2018

 

Welfare Rigidity, the Structure of Public Expenditure and the Welfare Trap

(Abstract)

 

Huang Shaoan, Chen Yan and Li Rui

 

Public welfare expenditure is characterized by rigidity, i.e. it goes up easily but is very hard to get down. We introduced welfare rigidity into an endogenous growth model that includes government expenditure in order to analyze the impact of welfare rigidity and the structure of public expenditure on economic growth and family utility. Our findings show that there is a non-monotonic relationship between welfare expenditure and economic growth. Depending on cross-country differences, this will display a negative direction or an inverted U-shape. Higher welfare rigidity reduces long-term economic growth and family utility. According to calculations of the optimal scale of public welfare expenditure, China, as a developing socialist country with a large population, has to do all it can to improve people’s livelihood but must at the same time weigh its limited resources so that welfare expenditure does not fall into a “welfare trap.”