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New Evidence on the Historical Growth of Government in Europe: The Role of Labor Costs

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  • Mickael Melki
  • Andrew Pickering

Abstract

We document a robust positive correlation between the size of government and the labor share of income in data from European countries covering the period 1869-1975. Following Facchini et al (2017), we interpret this correlation as evidence that labor costs drive public spending. The long-term increase in the labor share observed over this period explains half of the overall growth of central government. The relationship holds when the labor share is instrumented with movements in technological change at the frontier. When decomposing public spending, transfers, not intensive in labor, are the only component not associated with the labor share.

Suggested Citation

  • Mickael Melki & Andrew Pickering, 2019. "New Evidence on the Historical Growth of Government in Europe: The Role of Labor Costs," Discussion Papers 19/07, Department of Economics, University of York.
    • Handle: RePEc:yor:yorken:19/07
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    More about this item

    Keywords

    Labor share; Public Spending; 20th Century Europe.;
    All these keywords.

    JEL classification:

    • N4 - Economic History - - Government, War, Law, International Relations, and Regulation
    • J3 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs
    • E25 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Aggregate Factor Income Distribution

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