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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)


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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    References listed on IDEAS

    1. Fullerton, Don, 1982. "On the possibility of an inverse relationship between tax rates and government revenues," Journal of Public Economics, Elsevier, vol. 19(1), pages 3-22, October.
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    10. Karras, Georgios, 1996. "The Optimal Government Size: Further International Evidence on the Productivity of Government Services," Economic Inquiry, Western Economic Association International, vol. 34(2), pages 193-203, April.
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    13. Grossman, Herschel I & Lucas, Robert F, 1974. "The Macro-Economic Effects of Productive Public Expenditures," The Manchester School of Economic & Social Studies, University of Manchester, vol. 42(2), pages 162-170, June.
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    More about this item


    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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