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Is there a Laffer curve between aggregate output and public sector employment?

  • Matti Virén

    (University of Turku, FIN 20014 Turku, Finland and Bank of Finland, P.O. Box 160, FIN 00101 Helsinki, Finland)

  • Erkki Koskela

    (University of Helsinki, Department of Economics, P.O. Box 54 , FIN 00014, Finland)

Registered author(s):

    This paper develops a model of the relationship between public sector employment, total output and aggregate real demand in market prices, where public employment has a positive productivity effect on private output. Public employment crowds out private employment and output because its increase induces higher wages and taxes. The valuation of government output is also taken into account. While public employment affects total output and aggregate real demand in an a priori ambiguous way, numerical simulations suggest that the relationship may be nonlinear; positive, when public sector is "small" and negative, when it is "large". Using the annual data from 22 OECD countries over the period 1960-1996 and estimating and testing for threshold models and more commonly used specifications with multiplicative interaction terms give support to this nonlinearity hypothesis between public employment and private sector output.

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    Article provided by Springer in its journal Empirical Economics.

    Volume (Year): 25 (2000)
    Issue (Month): 4 ()
    Pages: 605-621

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    Handle: RePEc:spr:empeco:v:25:y:2000:i:4:p:605-621
    Note: received: October 1996/Final version received: April 2000
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    1. Devarajan, Shantayanan & Swaroop, Vinaya & Heng-fu, Zou, 1996. "The composition of public expenditure and economic growth," Journal of Monetary Economics, Elsevier, vol. 37(2-3), pages 313-344, April.
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    11. Hansen,B.E., 1999. "Testing for linearity," Working papers 7, Wisconsin Madison - Social Systems.
    12. Kormendi, Roger C, 1983. "Government Debt, Government Spending, and Private Sector Behavior," American Economic Review, American Economic Association, vol. 73(5), pages 994-1010, December.
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