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

  • Frederick van der Ploeg

If demand for human services is inelastic or manufactured goods are necessities, labour 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, labour supply is inelastic and there are few dependants. Otherwise, private affluence and public squalor result. More dependants boost public employment if the market provides poor substitutes, but public services per dependent may fall due to tax base erosion. Extensions to market and public employment being imperfect substitutes, varying utility of money and public sector productivity depends on pay.

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Paper provided by European University Institute in its series Economics Working Papers with number ECO2007/34.

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Date of creation: 2007
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Handle: RePEc:eui:euiwps:eco2007/34
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  1. Michiel Evers & Ruud de Mooij & Daniel van Vuuren, 2005. "What explains the variation in estimates of labour supply elasticities?," CPB Discussion Paper 51, CPB Netherlands Bureau for Economic Policy Analysis.
  2. Lawrence H. Summers, 1988. "Relative Wages, Efficiency Wages, and Keynesian Unemployment," NBER Working Papers 2590, National Bureau of Economic Research, Inc.
  3. Baumol, William J & Blackman, Sue Anne Batey & Wolff, Edward N, 1985. "Unbalanced Growth Revisited: Asymptotic Stagnancy and New Evidence," American Economic Review, American Economic Association, vol. 75(4), pages 806-17, September.
  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. 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.
  6. Assar Lindbeck, 2006. "Sustainable social spending," International Tax and Public Finance, Springer, vol. 13(4), pages 303-324, August.
  7. Layard, Richard & Nickell, Stephen & Jackman, Richard, 1991. "Unemployment: Macroeconomic Performance and the Labour Market," OUP Catalogue, Oxford University Press, number 9780198284345, March.
  8. 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.
  9. William Baumol, 1996. "Children of performing arts, the economic dilemma: The climbing costs of health care and education," Journal of Cultural Economics, Springer, vol. 20(3), pages 183-206, September.
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