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Sustainable Social Spending and Stagnant Public Services: Baumol's Cost Disease Revisited

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  • Frederick van der Ploeg

Abstract

If demand for human services is inelastic or manufactured goods are necessities, labor shifts from manufacturing to services and the budget share of services rises. Higher productivity growth in the market sector pushes up the tax rate and public employment if private goods and public services are poor substitutes, labor supply is inelastic, and there are few dependents. Otherwise, private affluence and public squalor result. More dependents boost public employment if the market provides poor substitutes, but public services per dependent may fall due to tax base erosion. We also provide extensions to market and public employment being imperfect substitutes, to varying utility of money, and to public-sector productivity depending on pay.

Suggested Citation

  • Frederick van der Ploeg, 2007. "Sustainable Social Spending and Stagnant Public Services: Baumol's Cost Disease Revisited," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 63(4), pages 519-547, December.
  • Handle: RePEc:mhr:finarc:urn:sici:0015-2218(200712)63:4_519:sssasp_2.0.tx_2-x DOI: 10.1628/001522107X269005
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    References listed on IDEAS

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    1. Bas van Groezen & Lex Meijdam & Harrie A. A. Verbon, 2005. "Serving the old: ageing and economic growth," Oxford Economic Papers, Oxford University Press, vol. 57(4), pages 647-663, October.
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    4. Blundell, Richard & Macurdy, Thomas, 1999. "Labor supply: A review of alternative approaches," Handbook of Labor Economics,in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 27, pages 1559-1695 Elsevier.
    5. Assar Lindbeck, 2006. "Sustainable social spending," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 13(4), pages 303-324, August.
    6. Charles I. Jones, 2002. "Why Have Health Expenditures as a Share fo GDP Risen So Much?," NBER Working Papers 9325, National Bureau of Economic Research, Inc.
    7. Summers, Lawrence H, 1988. "Relative Wages, Efficiency Wages, and Keynesian Unemployment," American Economic Review, American Economic Association, vol. 78(2), pages 383-388, May.
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    9. Anisul Islam, 2001. "Wagner's law revisited: cointegration and exogeneity tests for the USA," Applied Economics Letters, Taylor & Francis Journals, vol. 8(8), pages 509-515.
    10. William Baumol, 1996. "Children of performing arts, the economic dilemma: The climbing costs of health care and education," Journal of Cultural Economics, Springer;The Association for Cultural Economics International, vol. 20(3), pages 183-206, September.
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    Cited by:

    1. Andersen, Torben M & Kreiner, Claus Thustrup, 2013. "Baumol’s cost disease and the sustainability of the welfare state," CEPR Discussion Papers 9772, C.E.P.R. Discussion Papers.
    2. Torben M. Andersen, 2015. "The Nordic welfare model and welfare services - Can we maintain acceptable standards?," Economics Working Papers 2015-02, Department of Economics and Business Economics, Aarhus University.
    3. Facchini, Francois, 2014. "The determinants of public spending: a survey in a methodological perspective," MPRA Paper 53006, University Library of Munich, Germany.

    More about this item

    Keywords

    Baumol's cost disease; Wagner's law; congestion; cost of public funds; dependency ratio;

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • H0 - Public Economics - - General
    • J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J4 - Labor and Demographic Economics - - Particular Labor Markets
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

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