Univ. of Aarhus Economics Working Paper No. 2009-5
18 Pages Posted: 24 Mar 2009
Date Written: March 24, 2009
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: 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