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Can Labor Market Imperfections Cause Overprovision of Public Inputs?

Author

Listed:
  • Martinez, Diego

    (Department of Economics, University Pablo de Olavide)

  • Sjögren, Tomas

    (Department of Economics, Umeå School of Business and Economics, Umeå University)

Abstract

This paper concerns provision of productive public inputs in the presence of unemployment. It is shown that if the government is able to implement optimal taxes on labor income and profit income, respectively, then the public input will be underprovided. On the other hand, if the government is not able to implement an optimal tax on labor income, e.g. because the labor income tax is determined at another level in the public sector (e.g. the municipal or the state level), then overprovision may occur. We derive an equation which links overprovision of the public input to (i) the employment rate and to (ii) the deviation of the actual labor income tax from the optimal level.

Suggested Citation

  • Martinez, Diego & Sjögren, Tomas, 2013. "Can Labor Market Imperfections Cause Overprovision of Public Inputs?," Umeå Economic Studies 858, Umeå University, Department of Economics.
    • Handle: RePEc:hhs:umnees:0858
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    Cited by:

    1. Diego Martinez-Lopez & Tomas Sjöngren, 2014. "Vertical externalities with lump-sum taxes: how much difference does unemployment make?," European Journal of Government and Economics, Europa Grande, vol. 3(1), pages 75-87, June.
    2. Diego Martinez-Lopez & Tomas Sjöngren, 2014. "Vertical externalities with lump-sum taxes: how much difference does unemployment make?," European Journal of Government and Economics, Europa Grande, vol. 3(1), pages 75-87, June.

    More about this item

    Keywords

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    JEL classification:

    • H41 - Public Economics - - Publicly Provided Goods - - - Public Goods
    • J51 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining - - - Trade Unions: Objectives, Structure, and Effects

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