Scandinavian Working Papers in Economics

Umeå Economic Studies,
Umeå University, Department of Economics

No 858: Can Labor Market Imperfections Cause Overprovision of Public Inputs?

Diego Martinez () and Tomas Sjögren ()
Additional contact information
Diego Martinez: Department of Economics, University Pablo de Olavide, Postal: E - 41013, Sevilla Spain
Tomas Sjögren: Department of Economics, Umeå School of Business and Economics, Umeå University, Postal: S 901 87 Umeå, Sweden

Abstract: This paper concerns provision of productive public inputs in the presence of unemployment. It is shown that if the government is able to implement optimal taxes on labor income and profit income, respectively, then the public input will be underprovided. On the other hand, if the government is not able to implement an optimal tax on labor income, e.g. because the labor income tax is determined at another level in the public sector (e.g. the municipal or the state level), then overprovision may occur. We derive an equation which links overprovision of the public input to (i) the employment rate and to (ii) the deviation of the actual labor income tax from the optimal level.

Keywords: Public Inputs; Trade Unions

JEL-codes: H41; J51

13 pages, May 16, 2013

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