Public versus Private Production Decisions: Redistribution and the Size of the Public Sector

FinanzArchiv Public Finance Analysis 61(1):120-120, 2005, DOI: 10.1628/0015221053722505

Posted: 6 Sep 2014

See all articles by Jukka Pirttila

Jukka Pirttila

United Nations - World Institute for Development Economics Research (UNU/WIDER); Tampere University of Technology

Matti Tuomala

University of Tampere

Date Written: January 1, 2005

Abstract

We analyze the decision rules governing public employment policy, capital allocation between private and public sector, and the size of the public sector in a two-type and two-sector optimal nonlinear income-tax model with endogenous wages. The government can reduce wage inequality in the private sector by employing more unskilled workers and fewer skilled workers than is necessary to minimize cost at the prevailing gross wage rate and, if skilled labor and capital are complementary, by favoring public-sector capital accumulation. Therefore, production efficiency holds neither in public employment decision nor in capital allocation. The effects of public employment and investment on income inequality increase when the size of the public sector increases. The optimal size of the public sector is also shown to be relatively large when public employment and investments reduce wage inequality. These results help explain the growth in the public-sector size and why a larger government does not necessarily hamper growth.

JEL Classification: H11, H21, H40

Suggested Citation

Pirttila, Jukka and Tuomala, Matti, Public versus Private Production Decisions: Redistribution and the Size of the Public Sector (January 1, 2005). FinanzArchiv Public Finance Analysis 61(1):120-120, 2005, DOI: 10.1628/0015221053722505 . Available at SSRN: https://ssrn.com/abstract=2491807

Jukka Pirttila (Contact Author)

United Nations - World Institute for Development Economics Research (UNU/WIDER) ( email )

Katajanokanlaituri 6B
Helsinki, FIN-00160
Finland

Tampere University of Technology ( email )

P.O. 541, Korkeakoulunkatu 8 (Festia building)
Tampere, FI-33101
Finland

Matti Tuomala

University of Tampere ( email )

P.O. Box 607
Tampere, FIN-33101
Finland
+358-3-2156031 (Phone)
+358-3-2157254 (Fax)

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