Is there a Laffer curve between aggregate output and public sector employment?

Matti Virén and Erkki Koskela
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Matti Virén: University of Turku, FIN 20014 Turku, Finland and Bank of Finland, P.O. Box 160, FIN 00101 Helsinki, Finland

Empirical Economics, 2000, vol. 25, issue 4, 605-621

Abstract: This paper develops a model of the relationship between public sector employment, total output and aggregate real demand in market prices, where public employment has a positive productivity effect on private output. Public employment crowds out private employment and output because its increase induces higher wages and taxes. The valuation of government output is also taken into account. While public employment affects total output and aggregate real demand in an a priori ambiguous way, numerical simulations suggest that the relationship may be nonlinear; positive, when public sector is "small" and negative, when it is "large". Using the annual data from 22 OECD countries over the period 1960-1996 and estimating and testing for threshold models and more commonly used specifications with multiplicative interaction terms give support to this nonlinearity hypothesis between public employment and private sector output.

Keywords: public; sector; ·; Laffer; curve; ·; threshold; models (search for similar items in EconPapers)
JEL-codes: H11 J45 (search for similar items in EconPapers)
Date: 2001-01-10
Note: received: October 1996/Final version received: April 2000
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