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Baumol’s cost disease and the sustainability of the welfare state

Torben M Andersen and Claus Kreiner
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Torben M Andersen: Department of Economics and Business, Aarhus University

No 2015-02, EPRU Working Paper Series from Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics

Abstract: If productivity increases more slowly for services than for manufactured goods then services suffer from Baumol’s cost disease and tend to become relatively more costly over time. Since the welfare state in all countries is an important supplier of tax financed services, this translates into a financial pressure which seems to leave policymakers with a trilemma; increase taxes (and hence tax distortions), cut spending or redistribute less. Under the assumptions underlying Baumol’s cost disease, we show that these dismal implications are not warranted. The welfare state is sustainable and Baumol growth leaves scope for Pareto improvements.

Keywords: : Public sector; Baumol cost disease; welfare state sustainability (search for similar items in EconPapers)
JEL-codes: H4 H21 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-pbe and nep-pke
Date: 2015-02-09
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Related works:
Journal Article: Baumol's Cost Disease and the Sustainability of the Welfare State (2017) Downloads
Working Paper: Baumol’s cost disease and the sustainability of the welfare state (2013) Downloads
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