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Is There a Laffer Curve Between Output and Public Sector Employment?

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  • Koskela, Erkki
  • Virén, Matti

Abstract

This paper develops a model of the relationship between public sector employment, total output and aggregate real demand in market prices, where public employment has a positive productivity effect on private output and where public employment crowds out private employment and output via wage and tax effects. Also the valuation of government output is taken into account. While public employment affects total output and aggregate disposable income in an a priori ambiguous way, numerical simulations suggest that the relationship may be nonlinear; positive, when public sector is "small" and negative when it is "large". Using the annual data from 22 OECD countries over the period 1960 - 1996 and estimating and testing for threshold models gives support to this nonlinearity hypothesis between public employment and output.

Suggested Citation

  • Koskela, Erkki & Virén, Matti, 1999. "Is There a Laffer Curve Between Output and Public Sector Employment?," Discussion Papers 194, VATT Institute for Economic Research.
    • Handle: RePEc:fer:dpaper:194
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    References listed on IDEAS

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    Cited by:

    1. Kiander, Jaakko & Virén, Matti, 2000. "Do automatic stabilisers take care of asymmetric shocks in the euro area?," Discussion Papers 234, VATT Institute for Economic Research.
    2. Virén, Matti, 1999. "Fiscal Policy, Automatic Stabilisers and Policy Coordination in EMU," Discussion Papers 204, VATT Institute for Economic Research.

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