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

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  • Panu Poutvaara
  • Andreas Wagener

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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  • 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.
    • Handle: RePEc:kap:jeczfn:v:94:y:2008:i:2:p:105-124
    DOI: 10.1007/s00712-008-0002-6
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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

    Keywords

    Public sector; Labor intensity; Taxation; L33; J45; D24; H21;
    All these keywords.

    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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