Sustainable Social Spending and Stagnant Public Services: Baumol's Cost Disease Revisited

Frederick (Rick) van der Ploeg

FinanzArchiv: Public Finance Analysis, 2007, vol. 63, issue 4, 519-547

Abstract: If demand for human services is inelastic or manufactured goods are necessities, labor shifts from manufacturing to services and the budget share of services rises. Higher productivity growth in the market sector pushes up the tax rate and public employment if private goods and public services are poor substitutes, labor supply is inelastic, and there are few dependents. Otherwise, private affluence and public squalor result. More dependents boost public employment if the market provides poor substitutes, but public services per dependent may fall due to tax base erosion. We also provide extensions to market and public employment being imperfect substitutes, to varying utility of money, and to public-sector productivity depending on pay.

Keywords: Baumol's cost disease; Wagner's law; congestion; cost of public funds; dependency ratio (search for similar items in EconPapers)
JEL-codes: E62 H0 J22 J31 J4 O40 (search for similar items in EconPapers)
Date: 2007
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Citations: View citations in EconPapers (9)

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DOI: 10.1628/001522107X269005

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