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The welfare state and Baumol’s law

Author

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  • Martin Paldam

    () (School of Economics and Management, University of Aarhus, Denmark)

Abstract

The paper considers a two-sector economy with a constant population: The public sector, with stable productivity, and a private sector, with productivity growth. Baumol’s law says that such an economy has no steady state. It is demonstrated what this means. Two attempts to uphold a policy that fixes a key ratio are discussed: One policy fixes the tax share - this causes the share of the real public sector to vanish. The other policy fixes the share of real public production - this causes the tax pressure to keep rising.

Suggested Citation

  • Martin Paldam, 2009. "The welfare state and Baumol’s law," Economics Working Papers 2009-05, Department of Economics and Business Economics, Aarhus University.
  • Handle: RePEc:aah:aarhec:2009-05
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    File URL: ftp://ftp.econ.au.dk/afn/wp/09/wp09_05.pdf
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    Cited by:

    1. 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.

    More about this item

    Keywords

    Welfare state; steady state growth;

    JEL classification:

    • H5 - Public Economics - - National Government Expenditures and Related Policies
    • H11 - Public Economics - - Structure and Scope of Government - - - Structure and Scope of Government
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

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