Social safety nets protect citizens against hardship. By offering compensation, social safety nets may
help overcome the political resistance to trade liberalisation and structural reform, but they can also
weaken the incentives to work and save. Depending on their design, safety nets may also ease or impair
adjustment to changing economic circumstances. Against this backdrop, the paper looks at the impact of
social safety nets on output and employment and on the ability of economies to absorb adverse shocks.
Dependent on their design, the presence of extensive social safety nets is often associated with more
limited labour resource use and lower per capita GDP levels, even though activation policy can provide
offsets. Moreover, many of the characteristics of social safety nets that reduce output and employment
levels heighten the persistence of slack in the wake of adverse shocks. By contrast, the impact of social
safety nets on business investment and household saving, and by extension the current account balance, is
not clear-cut.
