The Welfare State and Baumol's Law

Univ. of Aarhus Economics Working Paper No. 2009-5

18 Pages Posted: 24 Mar 2009  

Martin Paldam

University of Aarhus - Department of Economics

Date Written: March 24, 2009

Abstract

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.

Keywords: Welfare state, steady state growth

JEL Classification: H5, H11, O41

Suggested Citation

Paldam, Martin, The Welfare State and Baumol's Law (March 24, 2009). Univ. of Aarhus Economics Working Paper No. 2009-5. Available at SSRN: https://ssrn.com/abstract=1367515 or http://dx.doi.org/10.2139/ssrn.1367515

Martin Paldam (Contact Author)

University of Aarhus - Department of Economics ( email )

Universitetsparken
Building 350
DK-8000 Aarhus C
Denmark
+45 8942 1133 (Phone)
+45 8613 6334 (Fax)

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