Why Is the Public Sector More Labor-Intensive? A Distortionary Tax Argument
AbstractGovernment-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.
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Bibliographic InfoPaper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 1413.
Length: 29 pages
Date of creation: Nov 2004
Date of revision:
Publication status: published in: Journal of Economics, 2008, 94 (2), 105–124
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Other versions of this item:
- Panu Poutvaara & Andreas Wagener, 2008. "Why is the public sector more labor-intensive? A distortionary tax argument," Journal of Economics, Springer, vol. 94(2), pages 105-124, July.
- Poutvaara, Panu & Wagener, Andreas, 2008. "Why is the public sector more labor-intensive? A distortionary tax argument," Munich Reprints in Economics 19825, University of Munich, Department of Economics.
- Panu Poutvaara & Andreas Wagener, 2004. "Why is the Public Sector More Labor-Intensive? A Distortionary Tax Argument," CESifo Working Paper Series 1259, CESifo Group Munich.
- L33 - Industrial Organization - - Nonprofit Organizations and Public Enterprise - - - Comparison of Public and Private Enterprise and Nonprofit Institutions; Privatization; Contracting Out
- J45 - Labor and Demographic Economics - - Particular Labor Markets - - - Public Sector Labor Markets
- D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
- H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
This paper has been announced in the following NEP Reports:
- NEP-ALL-2004-12-02 (All new papers)
- NEP-PBE-2004-12-02 (Public Economics)
- NEP-PUB-2004-12-02 (Public Finance)
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