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Why is the Public Sector More Labor-Intensive? A Distortionary Tax Argument

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  • Panu Poutvaara

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  • Andreas Wagener

Abstract

A relatively high labor-intensity in government-run entities need not imply slack in their organization. Rather, it is a rational reaction to various forms of wage tax advantage that the public sector has over private firms. Even though an unequal tax treatment of public and private sectors precludes production efficiency, it may improve welfare by mitigating the labor supply distortion. With inelastic labor supply, privatizing a previously government-run sector improves welfare, while with elastic labor supply a full outsourcing of government activities can never be optimal if it goes along with a decrease in net wages.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 1259.

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Date of creation: 2004
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Handle: RePEc:ces:ceswps:_1259

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Keywords: public sector; labor intensity; taxation;

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  1. Jeffry M. Netter & William L. Megginson, 2001. "From State to Market: A Survey of Empirical Studies on Privatization," Journal of Economic Literature, American Economic Association, vol. 39(2), pages 321-389, June.
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  3. European Commission, 2006. "Taxation trends in the European Union: 2006 edition," Taxation trends, Directorate General Taxation and Customs Union, European Commission 2006, Directorate General Taxation and Customs Union, European Commission.
  4. Gordon, Roger H. & Bai, Chong-En & Li, David D., 1999. "Efficiency losses from tax distortions vs. government control," European Economic Review, Elsevier, vol. 43(4-6), pages 1095-1103, April.
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  7. Andrei Shleifer, 1998. "State Versus Private Ownership," Harvard Institute of Economic Research Working Papers 1841, Harvard - Institute of Economic Research.
  8. Giacomo Corneo & Rafael Rob, . "Working in Public and Private Firms," Penn CARESS Working Papers 7942b6b570793de0891a05acb, Penn Economics Department.
  9. Alesina, Alberto & Baqir, Reza & Easterly, William, 2000. "Redistributive Public Employment," Journal of Urban Economics, Elsevier, vol. 48(2), pages 219-241, September.
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  12. Dasgupta, Partha & Stiglitz, Joseph E, 1972. "On Optimal Taxation and Public Production," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 39(1), pages 87-103, January.
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  15. European Commission, 2010. "Taxation trends in the European Union: 2010 edition," Taxation trends, Directorate General Taxation and Customs Union, European Commission 2010, Directorate General Taxation and Customs Union, European Commission.
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Cited by:
  1. Elinder, Mikael & Jordahl, Henrik, 2013. "Political preferences and public sector outsourcing," European Journal of Political Economy, Elsevier, vol. 30(C), pages 43-57.
  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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