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Why Is the Public Sector More Labor-Intensive? A Distortionary Tax Argument

  • Poutvaara, Panu

    ()

    (University of Munich)

  • Wagener, Andreas

    ()

    (Leibniz University of Hannover)

Government-run entities are often more labor-intensive than private companies, even with identical production technologies. This need not imply slack in the public sector, but may be a rational response to its wage tax advantage over private firms. A tax-favored treatment of public production precludes production efficiency. It reduces welfare when labor supply is constant. With an elastic labor supply, a wage tax advantage of the public sector may improve welfare if it allows for a higher net wage. This would counteract the distortion of labor supply arising from wage taxation. Full privatization is never optimal if the labor supply elasticity is positive but small.

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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 1413.

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Length: 29 pages
Date of creation: Nov 2004
Date of revision:
Publication status: published in: Journal of Economics, 2008, 94 (2), 105–124
Handle: RePEc:iza:izadps:dp1413
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  1. Paul H. Malatesta & Kathryn L. DeWenter, 2001. "State-Owned and Privately Owned Firms: An Empirical Analysis of Profitability, Leverage, and Labor Intensity," American Economic Review, American Economic Association, vol. 91(1), pages 320-334, March.
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  9. Giacomo Corneo & Rafael Rob, . "Working in Public and Private Firms," Penn CARESS Working Papers 7942b6b570793de0891a05acb, Penn Economics Department.
  10. Jeffry M. Netter & William L. Megginson, 2001. "From State to Market: A Survey of Empirical Studies on Privatization," Journal of Economic Literature, American Economic Association, vol. 39(2), pages 321-389, June.
  11. Jesus Felipe & Franklin M. Fisher, 2003. "Aggregation in Production Functions: What Applied Economists should Know," Metroeconomica, Wiley Blackwell, vol. 54(2-3), pages 208-262, 05.
  12. Dasgupta, Partha & Stiglitz, Joseph E, 1972. "On Optimal Taxation and Public Production," Review of Economic Studies, Wiley Blackwell, vol. 39(1), pages 87-103, January.
  13. Alesina, Alberto & Baqir, Reza & Easterly, William, 2000. "Redistributive Public Employment," Journal of Urban Economics, Elsevier, vol. 48(2), pages 219-241, September.
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