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

Author

Listed:
  • 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)

Abstract

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.

Suggested Citation

  • Matti Virén & Erkki Koskela, 2000. "Is there a Laffer curve between aggregate output and public sector employment?," Empirical Economics, Springer, vol. 25(4), pages 605-621.
    • 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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    Cited by:

    1. Viren, Matti, 2016. "Why isn't Europe Growing?," Economia Internazionale / International Economics, Camera di Commercio Industria Artigianato Agricoltura di Genova, vol. 69(4), pages 317-340.
    2. Parui, Pintu, 2020. "Fiscal Expansion, Government Debt and Economic Growth: A Post-Keynesian Perspective," MPRA Paper 102740, University Library of Munich, Germany.
    3. Virén, Matti, 2012. "How can growth be accelerated in Europe?," Research Discussion Papers 29/2012, Bank of Finland.
    4. Viren Matti, 2015. "Remedies for European growth problem," Discussion Papers 104, Aboa Centre for Economics.
    5. repec:zbw:bofrdp:2012_029 is not listed on IDEAS
    6. Virén, Matti, 2012. "How can growth be accelerated in Europe?," Bank of Finland Research Discussion Papers 29/2012, Bank of Finland.
    7. Erkki Koskela, 2001. "Is there a Laffer Curve between Private Output and Public Sector Employment?," CESifo Forum, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 2(04), pages 48-50, October.
    8. Erkki Koskela, 2001. "Is there a Laffer Curve between Private Output and Public Sector Employment?," CESifo Forum, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 2(4), pages 48-50, October.

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    More about this item

    Keywords

    public sector · Laffer curve · threshold models;

    JEL classification:

    • H11 - Public Economics - - Structure and Scope of Government - - - Structure and Scope of Government
    • J45 - Labor and Demographic Economics - - Particular Labor Markets - - - Public Sector Labor Markets

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