Social protection expenditures and performance-pay

The purpose of this article is to examine empirically the influence of the degree of labor market flexibility on public social protection expenditures. The empirical model explains SP theoretically in terms of Wagner’s law, the fiscal illusion theory, the modernization theory and the labor market institutions. Labor market institutions include the ease of hiring and firing policies, the labor-employer cooperation, wage determination flexibility, redundancy costs, linking pay to productivity (performance-pay), reliance on professional management, and the ratio of women in the labor force. Based on a sample of 53 developed and developing countries during 2007-2014, the empirical results show that performance-pay reduces the share of social protection expenditures to GDP. The results are robust to the inclusion of different individual and collective social protection risks and to changes in the estimation methodology. The article draws attention to the positive impact that organization-level performance-pay has on the government equity role in society. The article contributes to our understanding of the importance of flexible labor market institutions and human resource management practices to government expenditures on social protection.