Is Social Protection a Necessity or Luxury good? New Multivariate Cointegration Panel Data Results'

The aim of this paper is to test the claim that social protection is a luxury good. Therefore, GDP elasticity of selected social protection expenditure is estimated using a new econometric approach developed first by Kao and Chiang (Advances in Econometrics, 15, 179–222, 2000). Time series properties of selected social expenditure in 18 OECD countries from 1981 to 1998 are examined. Using panel data cointegration tests and OLS, FMOLS and DOLS estimators, results were found which differ from previous analyses reporting substantially higher income elasticities. With the FMOLS, selected social expenditure has income elasticities smaller than one but greater than one with the DOLS. It is noteworthy that whether selected social expenditure is stationary or nonstationary may have critical implications for researchers and policy makers desiring to model and explain the impact of this expenditure on a country economic system.