The Welfare State and Baumol's Law
University of Aarhus - Department of Economics
March 24, 2009
Univ. of Aarhus Economics Working Paper No. 2009-5
The paper considers a two-sector economy with a constant population: The public sector, with stable productivity, and a private sector, with productivity growth. Baumol's law says that such an economy has no steady state. It is demonstrated what this means. Two attempts to uphold a policy that fixes a key ratio are discussed: One policy fixes the tax share - this causes the share of the real public sector to vanish. The other policy fixes the share of real public production - this causes the tax pressure to keep rising.
Number of Pages in PDF File: 18
Keywords: Welfare state, steady state growth
JEL Classification: H5, H11, O41
Date posted: March 24, 2009
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