The Cost Disease of Public Services

Abstract

The cost-disease model explains why the public sector expands in an economy with rising productivity. Because of the nature of most public services, the scope for increased productivity is limited. Therefore, if both public and private consumption are to expand at similar rates, labor will have to be transferred from the private sector to the public sector and taxes will have to increase. Raising public pensions on par with incomes in the private sector will have a similar effect, and a rising share of retirees will further strengthen this effect.