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Sustainable Social Spending and Stagnant Public Services: Baumol's Cost Disease Revisited

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  • Frederick van der Ploeg

Abstract

If demand for human services is inelastic or manufactured goods are necessities, labour shifts from manufacturing to services and the budget share of services rises. Higher productivity growth in the market sector pushes up the tax rate and public employment if private goods and public services are poor substitutes, labour supply is inelastic and there are few dependants. Otherwise, private affluence and public squalor result. More dependants boost public employment if the market provides poor substitutes, but public services per dependent may fall due to tax base erosion. Extensions to market and public employment being imperfect substitutes, varying utility of money and public sector productivity depends on pay.

Suggested Citation

  • Frederick van der Ploeg, 2007. "Sustainable Social Spending and Stagnant Public Services: Baumol's Cost Disease Revisited," Economics Working Papers ECO2007/34, European University Institute.
    • Handle: RePEc:eui:euiwps:eco2007/34
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    References listed on IDEAS

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    Cited by:

    1. Torben M. Andersen & Claus T. Kreiner, 2017. "Baumol's Cost Disease and the Sustainability of the Welfare State," Economica, London School of Economics and Political Science, vol. 84(335), pages 417-429, July.
    2. Torben M. Andersen, 2015. "The Nordic welfare model and welfare services - Can we maintain acceptable standards?," Economics Working Papers 2015-02, Department of Economics and Business Economics, Aarhus University.
    3. Facchini, Francois, 2014. "The determinants of public spending: a survey in a methodological perspective," MPRA Paper 53006, University Library of Munich, Germany.
    4. Chen, Xiaoqing & Kerstens, Kristiaan & Tsionas, Mike, 2024. "Does productivity change at all in Swedish district courts? Empirical analysis focusing on horizontal mergers," Socio-Economic Planning Sciences, Elsevier, vol. 91(C).
    5. Torben M. Andersen, 2016. "Does The Public Sector Implode From Baumol'S Cost Disease?," Economic Inquiry, Western Economic Association International, vol. 54(2), pages 810-818, April.
    6. Sasaki, Hiroaki & Mizutani, Aya, 2024. "Public Services, Welfare, and Growth under Baumol's Cost Disease," MPRA Paper 121693, University Library of Munich, Germany.

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    More about this item

    Keywords

    Baumol's cost disease; Wagner's law; congestion; cost of public funds; dependency ratio;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H0 - Public Economics - - General
    • J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J4 - Labor and Demographic Economics - - Particular Labor Markets
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

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