Mickael Melki

Labour Costs and the Size of Government

Given inelastic demand for labour-intensive public services, the size of government dependspositivelyonlabourcosts.OECDdataexhibitastrongstatisticalassociationbetween government size and the business-sector labour share of income.When the labour share is instrumented with measures of technological change, institutional variation and predetermineddataitcontinuestopositivelyimpactgovernmentsize.Incontrast,transferspending is unaffected by the labour share.The evidence is consistent with the idea that the recent decline in the labour share has contributed to the slowdown in the growth of government witnessed in much of the post-war era.