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

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  • Erkki Koskela
  • Matti Virén
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    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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    Bibliographic Info

    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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    References

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    1. Shantayanan Devarajan & Vinaya Swaroop & Heng-fu Zou, 1996. "The composition of public expenditure and economic growth," CEMA Working Papers 77, China Economics and Management Academy, Central University of Finance and Economics.
    2. Grossman, Herschel I & Lucas, Robert F, 1974. "The Macro-Economic Effects of Productive Public Expenditures," The Manchester School of Economic & Social Studies, University of Manchester, vol. 42(2), pages 162-70, June.
    3. Seater, John J, 1993. "Ricardian Equivalence," Journal of Economic Literature, American Economic Association, vol. 31(1), pages 142-90, March.
    4. Riech, Utz P, 1986. "Treatment of Government Activity on the Production Account," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 32(1), pages 69-85, March.
    5. Fullerton, Don, 1982. "On the possibility of an inverse relationship between tax rates and government revenues," Journal of Public Economics, Elsevier, vol. 19(1), pages 3-22, October.
    6. Aschauer, David Alan, 1989. "Is public expenditure productive?," Journal of Monetary Economics, Elsevier, vol. 23(2), pages 177-200, March.
    7. 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.
    8. 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.
    9. Aschauer, David Alan, 1985. "Fiscal Policy and Aggregate Demand," American Economic Review, American Economic Association, vol. 75(1), pages 117-27, March.
    10. Aschauer, David Alan, 1989. "Does public capital crowd out private capital?," Journal of Monetary Economics, Elsevier, vol. 24(2), pages 171-188, September.
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    Cited by:
    1. Matti Virén, 1999. "Fiscal Policy, Automatic Stabilisers and Policy Coordination in EMU," Discussion Papers 204, Government Institute for Economic Research Finland (VATT).
    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).

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