Journal of Economics

, Volume 94, Issue 2, pp 105–124 | Cite as

Why is the public sector more labor-intensive? A distortionary tax argument

  • Panu Poutvaara
  • Andreas WagenerEmail author


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 reflect a wage tax advantage, stemming from the fact that government entities (partly) pay their taxes to themselves. A tax-induced cost advantage of public production precludes production efficiency and reduces welfare when labor supply is inelastic. With an elastic labor supply, a wage tax advantage of the public sector may improve welfare if it allows for a higher net wage.


Public sector Labor intensity Taxation 

JEL Classification

L33 J45 D24 H21 


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Copyright information

© Springer-Verlag 2008

Authors and Affiliations

  1. 1.Department of EconomicsUniversity of HelsinkiHelsinkiFinland
  2. 2.Faculty of Economics and ManagementUniversity of HannoverHannoverGermany

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