ABSTRACT
The issue whether the welfare state promotes or retards economic growth has become a major issue in recent macroeconomic studies. In this chapter we investigate some of the aspects of the welfare state in a macroeconomic model 1 with labor market adjustment process, wage-price spiral, and a Keynesian dynamic multiplier setup. The aggregate demand schedule underlying this dynamic multiplier is derived from Classical saving habits and an investment function which assumes that investment not only reacts to changing profitability in capitalist economies, but also to the conditions characterizing the capital-labor relationship, where persistently high employment rates may give rise to extensive welfare state measures. Those are usually labor market institutions in favor of labor, generous unemployment benefits, labor force participation in the firms’ decision making (in the hiring and firing practices of firms) and a considerable reduction of the workday, not all liked by ‘industrial leaders’ as Kalecki (1943, Ch. 12) has characterized those achievements.
