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Why is the public sector more labor-intensive? A distortionary tax argument

Author

Listed:
  • Poutvaara, Panu
  • Wagener, Andreas

Abstract

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 reflect a wage tax advantage, stemming from the fact that government entities (partly) pay their taxes to themselves. A tax-induced cost advantage of public production precludes production efficiency and reduces welfare when labor supply is inelastic. With an elastic labor supply, a wage tax advantage of the public sector may improve welfare if it allows for a higher net wage.

Suggested Citation

  • Poutvaara, Panu & Wagener, Andreas, 2008. "Why is the public sector more labor-intensive? A distortionary tax argument," Munich Reprints in Economics 19825, University of Munich, Department of Economics.
    • Handle: RePEc:lmu:muenar:19825
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    Citations

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    Cited by:

    1. Niklas Potrafke, 2019. "Does Public Sector Outsourcing Decrease Public Employment? Empirical Evidence from OECD Countries," CESifo Economic Studies, CESifo Group, vol. 65(4), pages 464-484.
    2. Panu Poutvaara & Henrik Jordahl, 2020. "Public sector outsourcing," World of Labour, LISER, pages 1-65, November.
    3. Akalbeo, Benard & Martinez-Vazquez, Jorge & Yedgenov, Bauyrzhan, 2023. "Fiscal decentralization and structural versus cyclical unemployment levels," European Journal of Political Economy, Elsevier, vol. 80(C).
    4. Elinder, Mikael & Jordahl, Henrik, 2013. "Political preferences and public sector outsourcing," European Journal of Political Economy, Elsevier, vol. 30(C), pages 43-57.
    5. Franco Mariuzzo & Patrick Paul Walsh & Ciara Whelan, 2004. "EU Merger Control in Differentiated Product Industries," CESifo Working Paper Series 1312, CESifo.
    6. Mohammad Suleiman Awwad, 2026. "The mediating role of internal marketing and job satisfaction in enhancing task and contextual performance: evidence from the Jordanian public sector," International Review on Public and Nonprofit Marketing, Springer;International Association of Public and Non-Profit Marketing, vol. 23(1), pages 47-68, March.
    7. KaiA. Konrad & SebastianG. Kessing, 2008. "Time Consistency and Bureaucratic Budget Competition," Economic Journal, Royal Economic Society, vol. 118(525), pages 1-15, January.
    8. Martínez Chombo Eduardo, 2009. "Sources of Over-Costs and Distortions in State-Owned Utilities in Mexico," Working Papers 2009-07, Banco de México.

    More about this item

    JEL classification:

    • L33 - Industrial Organization - - Nonprofit Organizations and Public Enterprise - - - Comparison of Public and Private Enterprise and Nonprofit Institutions; Privatization; Contracting Out
    • J45 - Labor and Demographic Economics - - Particular Labor Markets - - - Public Sector Labor Markets
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation

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