Welfare state spending increases income inequality, according to a report from the European Central Bank.
The report examined the role of income, inheritance, and the welfare state and how it relates to household net wealth across European countries.
The report found that in countries where there was a more developed welfare state, there was a higher inequality of wealth. “An increase in welfare state spending goes along with an increase—rather than a decrease—of observed wealth inequality,” the report states.
The European Central Bank says this happens because social services act as substitutes and households are therefore less incentivized to accumulate wealth.
Not only does the welfare state increase inequality, but Daniel Mitchell, a senior fellow at the Cato Institute who specializes in government spending and fiscal policy, says it reduces the labor supply and has a negative impact on savings and wealth accumulation.