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Is There a Laffer Curve Between Output and Public Sector Employment?

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Author Info
Erkki Koskela
Matti Virén
Abstract

This paper develops a model of the relationship between public sector employment, total output and aggregate real demand in market prices, where public employment has a positive productivity effect on private output and where public employment crowds out private employment and output via wage and tax effects. Also the valuation of government output is taken into account. While public employment affects total output and aggregate disposable income in an a priori ambiguous way, numerical simulations suggest that the relationship may be nonlinear; positive, when public sector is "small" and negative when it is "large". Using the annual data from 22 OECD countries over the period 1960 - 1996 and estimating and testing for threshold models gives support to this nonlinearity hypothesis between public employment and output.

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Paper provided by Government Institute for Economic Research Finland (VATT) in its series Discussion Papers with number 194.

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Date of creation: 01 Jan 1999
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Handle: RePEc:fer:dpaper:194

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Related research
Keywords: Public sector; Laffer curve; threshold models;

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Find related papers by JEL classification:
J45 - Labor and Demographic Economics - - Particular Labor Markets - - - Public Sector Labor Markets
H11 - Public Economics - - Structure and Scope of Government - - - Structure and Scope of Government

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. Aschauer, David Alan, 1985. "Fiscal Policy and Aggregate Demand," American Economic Review, American Economic Association, vol. 75(1), pages 117-27, March. [Downloadable!] (restricted)
  2. Don Fullerton, 1982. "On the Possibility of an Inverse Relationship between Tax Rates and Government Revenues," NBER Working Papers 0467, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  3. Aschauer, David Alan, 1989. "Is public expenditure productive?," Journal of Monetary Economics, Elsevier, vol. 23(2), pages 177-200, March. [Downloadable!] (restricted)
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  4. Hansen, Bruce E, 1996. "Inference When a Nuisance Parameter Is Not Identified under the Null Hypothesis," Econometrica, Econometric Society, vol. 64(2), pages 413-30, March. [Downloadable!] (restricted)
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  5. Riech, Utz P, 1986. "Treatment of Government Activity on the Production Account," Review of Income and Wealth, Blackwell Publishing, vol. 32(1), pages 69-85, March.
  6. Agell, Jonas & Lindh, Thomas & Ohlsson, Henry, 1997. "Growth and the public sector: A critical review essay," European Journal of Political Economy, Elsevier, vol. 13(1), pages 33-52, February. [Downloadable!] (restricted)
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  7. Devarajan, Shantayanan & Swaroop, Vinaya & Heng-fu, Zou, 1996. "The composition of public expenditure and economic growth," Journal of Monetary Economics, Elsevier, vol. 37(2-3), pages 313-344, April. [Downloadable!] (restricted)
  8. Aschauer, David Alan, 1989. "Does public capital crowd out private capital?," Journal of Monetary Economics, Elsevier, vol. 24(2), pages 171-188, September. [Downloadable!] (restricted)
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  9. Grossman, Herschel I & Lucas, Robert F, 1974. "The Macro-Economic Effects of Productive Public Expenditures," The Manchester School of Economic & Social Studies, Blackwell Publishing, vol. 42(2), pages 162-70, June.
  10. Seater, John J, 1993. "Ricardian Equivalence," Journal of Economic Literature, American Economic Association, vol. 31(1), pages 142-90, March. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Matti Virén, 1999. "Fiscal Policy, Automatic Stabilisers and Policy Coordination in EMU," Discussion Papers 204, Government Institute for Economic Research Finland (VATT). [Downloadable!]
  2. Jaakko Kiander & Matti Virén, 2000. "Do automatic stabilisers take care of asymmetric shocks in the euro area?," Discussion Papers 234, Government Institute for Economic Research Finland (VATT). [Downloadable!]
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