This paper uses data from 20 OECD countries to investigate the impact of welfare state
institutions (especially employment protection, wage bargaining and work incentives) on the
functioning of the labour market both theoretically and empirically. It shows that the impact of
welfare state institutions is not as clear-cut as the deregulationists' view suggests. This result
may be surprising against the background of the common view that welfare state measures
cause European employment problems but it is in line with the outcomes of many other
economic studies. The reasons for the ambiguous effects of welfare state institutions are
manifold but the most important reason is the complexity of the impacts. There are many
side-effects or second-round effects of welfare state institutions which, although often
neglected, prove to be very important in the real ‘imperfect market’ world. Many welfare state
institutions only have a clear-cut negative effect against the background of the theoretical
perfect market model.
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