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

  • Panu Poutvaara

    ()

  • Andreas Wagener

    ()

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.

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File URL: http://hdl.handle.net/10.1007/s00712-008-0002-6
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Article provided by Springer in its journal Journal of Economics.

Volume (Year): 94 (2008)
Issue (Month): 2 (July)
Pages: 105-124

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Handle: RePEc:kap:jeczfn:v:94:y:2008:i:2:p:105-124
Contact details of provider: Web page: http://www.springerlink.com/link.asp?id=108909

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