It is argued that increases in government spending that take the form of increases in government employment can have a negative impact on private-sector employment by increasing real wages. In fact, once the supply reducing effects of higher taxes needed to finance the increase in government employment are taken into account, the fall in private employment can be so large as to cause decreases in aggregate employment. The authors demonstrate this with quarterly Swedish data for the period 1964-90. Copyright 1996 by The editors of the Scandinavian Journal of Economics.
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