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The Growth Penalty of High Government Pay Rates

Author

Listed:
  • Sugden, Craig

    (Asian Development Bank)

  • Taniguchi, Kiyoshi

    (Asian Development Bank)

Abstract

This study examines the role of government pay rates in economic growth. A trend decline in government pay rates, expressed relative to what an economy can afford, is identified in many developing countries. The decline is attributed to the erosion of economic rents. Drawing on the theoretical insights of the Harris–Todaro two sector model, the study argues that static and dynamic benefits from the erosion of rents would lead to a negative relationship between government pay rates and economic growth. Utilizing the pooled regression models as well as the feasible two-stage generalized method of moments estimator, the study concludes that relative government pay rates are negatively related with economic growth in developing countries; hence, high government pay rates penalize economic growth. Countries that retain high government pay rates are identified.

Suggested Citation

  • Sugden, Craig & Taniguchi, Kiyoshi, 2008. "The Growth Penalty of High Government Pay Rates," ADB Economics Working Paper Series 118, Asian Development Bank.
    • Handle: RePEc:ris:adbewp:0118
    as

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    References listed on IDEAS

    as
    1. Joseph E. Stiglitz, 1974. "Alternative Theories of Wage Determination and Unemployment in LDC's: The Labor Turnover Model," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 88(2), pages 194-227.
    2. Jeffrey M Wooldridge, 2010. "Econometric Analysis of Cross Section and Panel Data," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262232588, April.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    economic growth; government pay rates; Harris-Todaro model; rents; two-sector model;
    All these keywords.

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • J45 - Labor and Demographic Economics - - Particular Labor Markets - - - Public Sector Labor Markets
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development

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