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Public Versus Private Production Decisions: Redistribution and the Size of the Public Sector

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  • Jukka Pirttilä
  • Matti Tuomala

Abstract

We analyze the decision rules governing public employment policy, capital allocation between private and public sector, and the size of the public sector in a two-type and two-sector optimal nonlinear income-tax model with endogenous wages. The government can reduce wage inequality in the private sector by employing more unskilled workers and fewer skilled workers than is necessary to minimize cost at the prevailing gross wage rate and, if skilled labor and capital are complementary, by favoring public-sector capital accumulation. Therefore, production efficiency holds neither in public employment decision nor in capital allocation. The effects of public employment and investment on income inequality increase when the size of the public sector increases. The optimal size of the public sector is also shown to be relatively large when public employment and investments reduce wage inequality. These results help explain the growth in the public-sector size and why a larger government does not necessarily hamper growth.

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Bibliographic Info

Article provided by Mohr Siebeck, Tübingen in its journal FinanzArchiv.

Volume (Year): 61 (2005)
Issue (Month): 1 (March)
Pages: 120-

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Handle: RePEc:mhr:finarc:urn:sici:0015-2218(200503)61:1_120:pvppdr_2.0.tx_2-d

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Related research

Keywords: public production; redistribution; nonlinear taxation; production efficiency; size of the government;

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Cited by:
  1. Kessing, Sebastian G. & Strozzi, Chiara, 2012. "The Regional Distribution of Public Employment: Theory and Evidence," IZA Discussion Papers 6449, Institute for the Study of Labor (IZA).

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