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

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  • Poutvaara, Panu

    ()
    (University of Munich)

  • Wagener, Andreas

    ()
    (Leibniz University of Hannover)

Abstract

Government-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 Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 1413.

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Length: 29 pages
Date of creation: Nov 2004
Date of revision:
Publication status: published in: Journal of Economics, 2008, 94 (2), 105–124
Handle: RePEc:iza:izadps:dp1413

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Keywords: taxation; public sector; labor intensity;

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References

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  1. Paul H. Malatesta & Kathryn L. DeWenter, 2001. "State-Owned and Privately Owned Firms: An Empirical Analysis of Profitability, Leverage, and Labor Intensity," American Economic Review, American Economic Association, American Economic Association, vol. 91(1), pages 320-334, March.
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Cited by:
  1. Elinder, Mikael & Jordahl, Henrik, 2012. "Political Preferences and Public Sector Outsourcing," IZA Discussion Papers 6632, Institute for the Study of Labor (IZA).
  2. Eduardo Martínez Chombo, 2009. "Sources of Over-Costs and Distortions in State-Owned Utilities in Mexico," Working Papers, Banco de México 2009-07, Banco de México.

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