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

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  • Panu Poutvaara

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  • Andreas Wagener

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Abstract

A relatively high labor-intensity in government-run entities need not imply slack in their organization. Rather, it is a rational reaction to various forms of wage tax advantage that the public sector has over private firms. Even though an unequal tax treatment of public and private sectors precludes production efficiency, it may improve welfare by mitigating the labor supply distortion. With inelastic labor supply, privatizing a previously government-run sector improves welfare, while with elastic labor supply a full outsourcing of government activities can never be optimal if it goes along with a decrease in net wages.
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Suggested Citation

  • 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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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Elinder, Mikael & Jordahl, Henrik, 2013. "Political preferences and public sector outsourcing," European Journal of Political Economy, Elsevier, pages 43-57.
    2. Eduardo Martínez Chombo, 2009. "Sources of Over-Costs and Distortions in State-Owned Utilities in Mexico," Working Papers 2009-07, Banco de México.
    3. Panu Poutvaara, 2014. "Public-sector outsourcing," IZA World of Labor, Institute for the Study of Labor (IZA), pages 1-65.
    4. Franco Mariuzzo & Patrick Paul Walsh & Ciara Whelan, 2004. "EU Merger Control in Differentiated Product Industries," CESifo Working Paper Series 1312, CESifo Group Munich.

    More about this item

    Keywords

    Public sector; Labor intensity; Taxation; L33; J45; D24; H21;

    JEL classification:

    • 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
    • L33 - Industrial Organization - - Nonprofit Organizations and Public Enterprise - - - Comparison of Public and Private Enterprise and Nonprofit Institutions; Privatization; Contracting Out

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