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Why Is the Public Sector More Labor-Intensive? A Distortionary Tax Argument

Panu Poutvaara () and Andreas Wagener

No 1413, IZA Discussion Papers from Institute of Labor Economics (IZA)

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 be a rational response to its wage tax advantage over private firms. A tax-favored treatment of public production precludes production efficiency. It reduces welfare when labor supply is constant. With an elastic labor supply, a wage tax advantage of the public sector may improve welfare if it allows for a higher net wage. This would counteract the distortion of labor supply arising from wage taxation. Full privatization is never optimal if the labor supply elasticity is positive but small.

Keywords: taxation; public sector; labor intensity (search for similar items in EconPapers)
JEL-codes: D24 H21 J45 L33 (search for similar items in EconPapers)
Pages: 29 pages
Date: 2004-11
New Economics Papers: this item is included in nep-pbe and nep-pub
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Published in: Journal of Economics, 2008, 94 (2), 105–124

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Related works:
Journal Article: Why is the public sector more labor-intensive? A distortionary tax argument (2008) Downloads
Working Paper: Why is the public sector more labor-intensive? A distortionary tax argument (2008)
Working Paper: Why is the Public Sector More Labor-Intensive? A Distortionary Tax Argument (2004) Downloads
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