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 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.
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Poutvaara, P., Wagener, A. Why is the public sector more labor-intensive? A distortionary tax argument. J Econ 94, 105–124 (2008). https://doi.org/10.1007/s00712-008-0002-6
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DOI: https://doi.org/10.1007/s00712-008-0002-6