Research Papers in Economics,
Stockholm University, Department of Economics

Abstract: The large differences among advanced OECD countries in the shares of workers that are employed by the government can probably only to a small part be explained by factors that are in the center of modern organization theory explanations for public vs. private ownership. This paper explores a new hypothesis for explaining the share of government employment. It is based on asymmetric information about individual worker productivity between the taxman, and workers and their employers. Hence, government employment opens up policy options, not available with only private production. The hypothesis is that government employment is an efficient element of redistribution policy. The mechanism is that the government can, through its employment policy, increase the relative scarcity in the private sector of the workers the government wants to redistribute in favor of. That increases their wages and lowers the need for redistribution through the tax- and transfer systems, which mitigates distortions. One can therefore expect large government employment in countries where the tolerance of inequality is low.

Keywords: Structure and Scope of Government; Optimal non-linear income taxation; public production; production efficiency

JEL-codes: H11; H21; H23

21 pages, September 11, 2002

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