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Why is the public sector more labor-intensive? A distortionary tax argument

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Author Info

  • Panu Poutvaara

    ()

  • Andreas Wagener

    ()

Abstract

Government-run entities are often more labor-intensive than private companies, even with identical production technologies. This need not imply slack in the public sector, but may be a rational response to its wage tax advantage over private firms. A tax-favored treatment of public production precludes production efficiency. It reduces welfare when labor supply is constant. With an elastic labor supply, a wage tax advantage of the public sector may improve welfare if it allows for a higher net wage. This would counteract the distortion of labor supply arising from wage taxation. Full privatization is never optimal if the labor supply elasticity is positive but small.

(This abstract was borrowed from another version of this item.)

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File URL: http://hdl.handle.net/10.1007/s00712-008-0002-6
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Bibliographic Info

Article provided by Springer in its journal Journal of Economics.

Volume (Year): 94 (2008)
Issue (Month): 2 (July)
Pages: 105-124

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Handle: RePEc:kap:jeczfn:v:94:y:2008:i:2:p:105-124

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Web page: http://www.springerlink.com/link.asp?id=108909

Related research

Keywords: Public sector; Labor intensity; Taxation; L33; J45; D24; H21;

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References

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  1. Easterly, William & Baqir, Reza & Alesina, Alberto, 2000. "Redistributive Public Employment," Scholarly Articles 4553013, Harvard University Department of Economics.
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Cited by:
  1. Elinder, Mikael & Jordahl, Henrik, 2012. "Political Preferences and Public Sector Outsourcing," IZA Discussion Papers 6632, Institute for the Study of Labor (IZA).
  2. Eduardo Martínez Chombo, 2009. "Sources of Over-Costs and Distortions in State-Owned Utilities in Mexico," Working Papers 2009-07, Banco de México.

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