The macroeconomics of unbalanced growth and the expanding public sector: Some simple tests of a model of government growth

A now classic model of public sector growth is Baumol's (1967) ‘Macroeconomics of Unbalanced Growth’. That model implies that one cause of public sector expenditure growth is a low or zero rate of productivity growth in the public sector relative to the private sector. Previous studies have tested, and partially confirmed, the Baumol hypothesis by computing productivity indices for various public sector activities. In this paper I attempt to test that model in a more direct manner. The unbalanced growth model is used to predict growth rates of per capita government expenditures, government's share of GNP and the pattern of government expenditure growth. These predictions are compared with observed growth rates of aggregate government expenditures. The model predicts the growth rate aggregate government expenditures, the growth rate of government's share of GNP, and the pattern of government expenditure growth reasonably well, and the data tend to support the Baumol model.     

A note on the sustainability of full employment in the presence of budget deficits

In a recent issue of this journal, Tymoigne and Wray, as well as Palley, discussed whether economies can experience stable full-employment equilibria with persistent public budget deficits. This implies continuous growth of a stock-variable: high-powered money and/or government bonds in the hands of the private sector. Their discussion assumed a stationary state. The question is whether such a situation can be regarded as sustainable over time. This paper argues that a satisfactory solution to the problem can be found only by abandoning the hypothesis of stationary state and considering the effects that different compositions of public expenditure have on the rate of growth. To have a stable full-employment equilibrium with budget deficits, the economy must grow. Since the economy is assumed to be in full employment, the growth of aggregate output must be entirely due to the growth of productivity, which can be realized by changing the composition of public spending in favor of productive expenditures.     

Does Government Expenditure Crowd Out Private Consumption in Italy? Evidence from a Microeconomic Model

An abnormal expansion of the public sector may create serious problems to the market economy, as the literature suggests. This issue is quite important in countries such as Italy where the size of the public sector and of its debt are quite relevant. In this paper a model, in the microeconomic tradition, is developed and applied to the italian economy using a quite general utility function to represent consumer's behaviour. The aim of the article is to set up a methological framework in which to test for the hypothesis that the provision of public and impure public goods crowds out private consumption. The main result of the analysis is that, in Italy, traditional public goods play a neutral role in expenditure decisions while impure public goods crowd out private consumption. This crowding out is created by over-production of these services; merit goods are direct complements to a wide range of private goods, but this beneficial effect is more than offset by the negative income effect related to their financing.     

Can total factor productivity explain value added growth in services?

This paper examines the factors responsible for generating the services led growth witnessed in the Indian economy during 1980–2005. A sectoral growth accounting exercise shows that total factor productivity (TFP) growth was the fastest for services; moreover this TFP increase was significant in accounting for service sector value added growth. A growth model with agriculture, industry and services as three principal sectors is calibrated to Indian data using sectoral TFP growth rates. The baseline model performs well in accounting for the evolution of value added shares and their growth rates, but is unable to capture sectoral employment share trends. The performance of the model with respect to value added shares improves when the post 1991 increase in service sector TFP growth following the inception of market-based liberalization reforms is accounted for. A modified version of the model with public capital can better track trends in sectoral employment shares.     

The implications of heterogeneous resource intensities on technical change and growth

Abstract We analyze the long‐term dynamics of an economy in which sectors are heterogeneous with respect to the intensity of natural resource use. It is shown that heterogeneity induces technical change to be biased towards resource‐intensive sectors. Along the balanced growth path, the sectoral structure of the economy is constant as the higher resource dependency in resource‐intensive sectors is compensated by enhanced research activities. Resource taxes have no impact on dynamics except when the tax rate varies over time. Research subsidies and the sectoral provision of productivity‐enhancing public goods raise growth and provide an effective tool for structural policy.     

Job creation and temporary emigration: the Albanian experience1

This paper focuses on job flows and unemployment in Albania during the transition from a closed, communist system to an open, free-market economy, and examines the role of emigration in the restructuring of the country. Our theoretical model indicates that in Albania, temporary emigration may have a significant positive effect on hiring in the private sector, reducing unemployment. Using sectoral data on employment, we illustrate the importance of emigration as an alternative for the Albanian labour force, and we measure the extent to which job ‘destruction’ in some sectors of the economy has been compensated for by job ‘creation’ in others. On these grounds, we compare the progress of Albania with other former socialist countries in Europe.     

EXPERIENCE OF PRIVATIZATION IN EASTERN GERMANY*

ABSTRACT^**: The analysis of the experience of privatization in Eastern Germany shows that the boundaries between the private and public sectors will become increasingly blurred, with the public sector becoming more like the private sector. One may also expect that employment will fall and productivity greatly increase. The legislature's urge to regulate everything will ultimately subside but the public sector will continue to be of vital importance for the economy as a whole. A modernized public sector will be able to deploy its services to make an important contribution to economic growth and employment.     

Private sector employment in Russia: Scale, composition and performance

In Russia, as across Central and Eastern Europe, privatization and the establishmemt of new private firms have been viewed as key factors in labour market adjustment during the transition period. This paper considers the overall employment developments in the private sector in Russia and the extent to which the private sector employment performance is differentiated from that of other sectors in five Russian regions. The analysis is based on a fresh look at these issues using official statistics published by Goskomstat and drawing on microdata from the March 1996 Russian Labour Force Survey (LFS). A special questionnaire attached to the LFS in the study regions provides supplementary information.
The paper highlights shifts in the sectoral composition of employment, including growth in private sector employment. Compared to other forms of ownership, the analysis confirms a tendency for private sector ownership in the study regions to be associated with stronger employment performance with respect to hours worked and, in some cases, timely payment of wages. Private sector firms appear to have relatively flexible employment patterns, utilizing more fixed-term or part-time employment than other types of firms and experiencing greater labour turnover. Also, private sector employees tend to be somewhat younger and probably more adaptable people. However, there is significant variation across the study regions and substantial exceptions exist with respect to the above-mentioned tendencies. With respect to employment issues, the differentiation between sectors appears to be less pronounced than one might have expected.     

Endogenous growth and changing sectoral composition in advanced economies

We study how changing sectoral composition in employment and output shares affects aggregate growth by modeling a two-sector economy with a technologically “progressive” industry, which produces for consumption and investment, and a technologically “stagnant” industry producing only for consumption. Hence, unbalanced improvements in total factor productivity interact with changes in the composition of final demand in shaping the growth process. Within this endogenous growth framework, we show under what conditions on preferences Baumol's asymptotic stagnancy occurs. Beside studying the limiting behavior of the economy, numerical examples are presented to analyze the structural change going on along the transition path.     

Government expenditure composition and fiscal policy spillovers in small open economies within a monetary union

We examine the implications of government expenditure that is complementary to private consumption, and government investment that can improve the productivity of private capital, in a global DSGE model. We show that government investment can improve an economy’s external competitiveness and stimulate private investment. If governments can finance this investment by reducing consumption that is not complementary to private consumption, then this is ex-ante budget-neutral, provides a small, but persistent stimulus without a deterioration in competitiveness, and leads to lower debt in the medium run. We also examine the cross-border transmission channels of government expenditure shocks in a monetary union when government consumption is complementary to private and public investment is productive. While both assumptions enhance cross-border spillovers, a direct import content is required to generate spillovers similar to those found in the empirical literature.     

Inequality,public good provision and the composition of trade

This paper investigates the effect of trade liberalization on the provision of public goods and shows that inequality also plays a vital role here. Public goods help enhance the productivity of firms, lower prices and raise profitability. The provision of public goods has different effects in closed and open economies. In an open economy, the impact of productive spending on increasing profit is stronger. Consequently, the opening up of the economy shifts the benefits of productive public goods from consumers to firms. As the median voters’, share of the firm’s profit rises, public goods become more appealing and flourish. Consequently, the manufacturing export is boosted by a rise in productivity.     

Did the pattern of aggregate employment growth change in the euro area in the late 1990s?

This paper examines whether the pattern of growth in euro area employment seen in the period 1997 to 2001 differs from that recorded in the past and what could be the reasons. First, a standard employment equation is estimated for the euro area as a whole. This shows that the lagged impact of both output growth and real labour cost growth, together with a productivity trend and employment ‘inertia’, can account for most of the employment developments between 1970 and the early 1990s. Conversely, these traditional determinants can only explain part of the employment development seen in recent years (1997 to 2001). Second, the paper shows sound evidence of a structural break in the aggregate employment equation in the late 1990s. Third, the paper provides some tentative explanations for this change in aggregate employment developments, using in particular country panels of institutional variables and of active labour market policies but also cross-sectional analyses. Among the relevant factors likely to have contributed to rising aggregate employment in recent years are changes in the sectoral composition of euro area employment, the strong development of part-time jobs, lower labour tax rates and possibly less stringent employment protection legislation and greater subsidies to private employment.     

Sectoral regularities of productivity growth in developing countries--a Kaldorian interpretation

This paper provides a Kaldorian interpretation for empiricalregularities of productivity growth at the sectoral level ofthe economy. The statistical evidence is based on a datasetdrawn from internationally compatible time series for employmentand value added in 30 developing countries. Based on novel non-linearstatistical techniques the findings show: (i) a regular patternof positive sectoral employment elasticities with respect tooutput growth; (ii) robust differences across sectors in themagnitude of the employment elasticities; and (iii) employmentelasticities for all sectors that are significantly less thanunity, suggesting strong evidence for increasing returns atthe sector level of the economy.     

Industrial structure and jobless growth in transition economies

When does employment growth mirror aggregate growth? Applying a two sector model, where productivity growth differs across sectors of production, this article is concerned with a feature characterising a number of transition economies: a divergence between production and employment growth. In our framework the industrial structure that allows employment growth to mirror output growth is endogenous, and related to a number of industry- and economy-wide characteristics. The article shows how the critical industrial structure necessary for avoiding ‘jobless growth’ is context-specific, questioning a ‘one size fits all’ policy approach when aiming to fulfil the Europe 2020 Strategy.     

Regional productivity variation and the impact of public capital stock: an analysis with spatial interaction,with reference to Spain

In this article, we examine whether variations in the level of public capital across Spain's Provinces affected productivity levels over the period 1996 to 2005. The analysis is motivated by contemporary urban economics theory, involving a production function for the competitive sector of the economy (‘industry’) which includes the level of composite services derived from ‘service’ firms under monopolistic competition. The outcome is potentially increasing returns to scale resulting from pecuniary externalities deriving from internal increasing returns in the monopolistic competition sector. We extend the production function by also making (log) labour efficiency a function of (log) total public capital stock and (log) human capital stock, leading to a simple and empirically tractable reduced form linking productivity level to density of employment, human capital and public capital stock. The model is further extended to include technological externalities or spillovers across provinces. Using panel data methodology, we find significant elasticities for total capital stock and for human capital stock, and a significant impact for employment density. The finding that the effect of public capital is significantly different from zero, indicating that it has a direct effect even after controlling for employment density, is contrary to some of the earlier research findings which leave the question of the impact of public capital unresolved.     

Competition,taxation and economic growth

The paper mainly examines the relationship between economic growth, tax policy and sectoral labor distribution in an endogenous growth model with expanding varieties. For analyzing these relationships, we consider an economy where three sectors of production are vertically integrated: final goods sector, intermediate goods sector and research sector. We show that the extent of imperfect competition in the intermediate products market affects both economic growth and the allocation of the available labor to all the sectors employing this input. The resources from capital taxation, which are used for financing research sector, have a U-shaped effect on growth and lead to a movement of the labor from research sector to final goods sector. Additionally, we show that if there exists a higher competitive structure in an economy, the probability of the positive effect of an increase in tax on growth gets higher.     

Employment and Wages in the Private and Local Government Sectors in a Centralized Fiscal System

This paper discusses the interaction between the local government and private sector in an institutional context consistent with a centralized fiscal system. Under decentralized wage setting in the private sector, the effects of shocks in the two sectors depend on whether private and local public goods are substitutes or complements in the union utility function. Higher wage markup in the local government sector unambiguously decreases government output while the effect on private sector employment is ambiguous. Higher income taxes have ambiguous effects on local government output. Shocks in the private sector can be reinforced through feedback effects from the local government sector. A shift from decentralized to centralized wage setting in the private sector reduces wages and increases employment in both sectors.     

International Factor Mobility, Government Size and Welfare

An examination of the available data reveals that the size of government varies considerably across time and countries. By making use of a simple general equilibrium model, this paper demonstrates that size of government is affected by the availability of capital and labour within an economy. Specifically, this paper utilises a model of a closed economy that produces one-private and one-public good. Both goods are produced by means of capital and labour. Production functions are subject to constant returns to scale and perfect competition prevails in all markets. The elasticity of substitution between the public and the private good is greater than unity and there is no international factor mobility in the initial equilibrium. The size of government is measured by total spending on the public good as a proportion of the total expenditure on the private and public goods. It is shown that capital (labour) inflow can decrease (increase) the size of government. Capital inflow increases welfare if the private good is relatively capital intensive whereas labour inflow increases welfare if the public good is relatively capital intensive.     

On the interaction between public and private capital in economic growth

This paper introduces two forms of interaction between private and public capital in an endogenous growth model in which productive government expenditure takes the form of a stock-variable and public capital is used in part as an input in the production of final output and in part to increase its own supply. While the first form of interaction involves the stocks of the two capital-goods and takes place within the final output sector through the specification of the aggregate production function (Cobb?CDouglas vs. CES), the second one concerns the rates of investment in the two kinds of capital. The share of productive public expenditure devoted to output production can be either exogenous or endogenous. Our results suggest that when this share is exogenous, along the balanced growth path the optimal growth rate of the economy is a positive function of the degree of complementarity between the two forms of investment. When the share of productive public expenditure devoted to output production is endogenous, the public capital share in GDP becomes, along with the model??s preference parameters, an important determinant of the economy??s long run growth. We also find that the optimal growth rate is an increasing function of the elasticity of substitution between public and private capital inputs in goods production, and is independent of the complementarity/substitutability between the two forms of investment.     

U.S. INCOME, SAVING, AND WEALTH, 1929—1969

The objective of this paper is to present income and expenditure accounts, accumulation accounts, and the asset side of the wealth accounts for the U.S. private national economy in current and constant prices. These accounts are integrated with the production and factor outlay accounts for the U.S. private domestic economy in current and constant prices given in our earlier papers. Taken together, these accounts constitute a complete accounting system in current and constant prices for the private sector of the U.S. economy.
Our complete accounting system incorporates a new concept of the standard of living, defined as the ratio of the quantity index of gross private national expenditures to the quantity index of gross private national consumer receipts. Our concept of the standard of living is similar but not identical to our concept of total factor productivity. Changes in the private standard of living reflect both changes in total factor productivity and changes in the proportion of the total product consumed in the public sector.