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The Labor Share and the Size of Government

  • François Facchini
  • Mickael Melki
  • Andrew Pickering

The size of government depends positively on the labor share given price-inelastic demand for public services. OECD data support this hypothesis and also show a stronger dependence under left-wing ideology because larger government employs a larger workforce. A permanent one standard deviation increase in the labor share is found on average to increase government size by about 9% of GDP, with increases of 6% in right-wing countries and 12% in left-wing countries. Contrary to Baumol's cost-disease the relationship is estimated to be independent of income. Recent reductions in the labor-share have substantially slowed the growth of government in many countries.

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Paper provided by Department of Economics, University of York in its series Discussion Papers with number 13/02.

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Date of creation: Jan 2013
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Handle: RePEc:yor:yorken:13/02
Contact details of provider: Postal: Department of Economics and Related Studies, University of York, York, YO10 5DD, United Kingdom
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