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Poutvaara, Panu; Wagener, Andreas (2008): Why is the public sector more labor-intensive? A distortionary tax argument. In: Journal of Economics / Zeitschrift für Nationalökonomie, Vol. 94, No. 2: pp. 105-124
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Government-run entities are often more labor-intensive than private companies, even with identical production technologies. This need not imply slack in the public sector, but may reflect a wage tax advantage, stemming from the fact that government entities (partly) pay their taxes to themselves. A tax-induced cost advantage of public production precludes production efficiency and reduces welfare when labor supply is inelastic. With an elastic labor supply, a wage tax advantage of the public sector may improve welfare if it allows for a higher net wage.