Welfare state and social spending: assessing the effectiveness and the efficiency of European social policies in 22 EU countries

This paper aims at analysing the effectiveness and the efficiency of social public expenditure in 22 European countries. We present a basic theoretical framework connecting the choice of the level of social protection to the median voter’s preferences and the inefficiency of expenditure. To test it against real data, we construct performance and efficiency indicators. While the existing literature measures the performance of social policy restricting the analysis to its impact on inequality and the labour market, our index summarises the outcomes achieved in all sectors of social protection (family, health, labour market elderly, disabled, unemployment, inequality). Based on this, we find that the ranking of countries differs from those found in the literature. We then put together performance and the amount of expenditure needed to achieve it (to better compare countries, we use social public expenditure net of tax and transfers), constructing efficiency indicators and a production possibility frontier through the FHD method. We find that efficiency is not related to the size of public intervention. Rather, our results suggest that population size and the type of the welfare system might be more relevant factors: small countries tend to be more efficient than large ones and targeting all sectors of social policy tends to be more efficient than concentrating on some areas only.