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Why is the public sector more labor-intensive? A distortionary tax argument

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  • Poutvaara, Panu
  • Wagener, Andreas

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 reflect a wage tax advantage, stemming from the fact that government entities (partly) pay their taxes to themselves. A tax-induced cost advantage of public production precludes production efficiency and reduces welfare when labor supply is inelastic. With an elastic labor supply, a wage tax advantage of the public sector may improve welfare if it allows for a higher net wage.

Suggested Citation

  • 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.
  • Handle: RePEc:lmu:muenar:19825
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    Cited by:

    1. Niklas Potrafke, 2019. "Does Public Sector Outsourcing Decrease Public Employment? Empirical Evidence from OECD Countries," CESifo Economic Studies, CESifo, vol. 65(4), pages 464-484.
    2. Elinder, Mikael & Jordahl, Henrik, 2013. "Political preferences and public sector outsourcing," European Journal of Political Economy, Elsevier, vol. 30(C), pages 43-57.
    3. Panu Poutvaara & Henrik Jordahl, 2020. "Public sector outsourcing," IZA World of Labor, Institute of Labor Economics (IZA), pages 1-65, November.
    4. Franco Mariuzzo & Patrick Paul Walsh & Ciara Whelan, 2004. "EU Merger Control in Differentiated Product Industries," CESifo Working Paper Series 1312, CESifo.
    5. Kai A. Konrad & Sebastian G. Kessing, 2008. "Time Consistency and Bureaucratic Budget Competition," Economic Journal, Royal Economic Society, vol. 118(525), pages 1-15, January.
    6. Martínez Chombo Eduardo, 2009. "Sources of Over-Costs and Distortions in State-Owned Utilities in Mexico," Working Papers 2009-07, Banco de México.
    7. Akalbeo, Benard & Martinez-Vazquez, Jorge & Yedgenov, Bauyrzhan, 2023. "Fiscal decentralization and structural versus cyclical unemployment levels," European Journal of Political Economy, Elsevier, vol. 80(C).

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    More about this item

    JEL classification:

    • 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

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