Can Labor Market Imperfections Cause Overprovision of Public Inputs?

Diego Martínez and Tomas Sjögren

No 858, Umeå Economic Studies from Umeå University, Department of Economics

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.

Keywords: Public Inputs; Trade Unions (search for similar items in EconPapers)
JEL-codes: H41 J51 (search for similar items in EconPapers)
Pages: 13 pages
Date: 2013-05-16
New Economics Papers: this item is included in nep-pbe
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Citations: View citations in EconPapers (1)

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Related works:
Working Paper: Can Labor Market Imperfections Cause Overprovision of Public Inputs? (2009)
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