New evidence on the historical growth of government in Europe: The role of labor costs |
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| Institution: | 1. Paris School of Business, 59 Rue Nationale, 75013, Paris, France;2. University of York, UK;1. Baugh Center for Entrepreneurship & Free Enterprise, Baylor University, USA;2. Department of Economics, Clemson University, USA;1. Wake Forest University, USA;2. Saint Louis University, USA;1. ICREA-A & Department of Economics and Business (UPF) and Barcelona Graduate School of Economics, Spain;2. Warwick University, UK |
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| Abstract: | We document a robust positive correlation between the size of government and the labor share of income in data from European countries covering the period 1869–1975. Following Facchini et al. (2017), we interpret this correlation as evidence that labor costs drive public spending. The long-term increase in the labor share observed over this period explains half of the overall growth of central government. The relationship holds when the labor share is instrumented with movements in technological change at the frontier. When decomposing public spending, transfers, not intensive in labor, are the only component not associated with the labor share. |
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| Keywords: | Labor share Public spending 20th century Europe N4 J3 E25 |
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