Michael Lundholm, Hans Wijkander
Why Do Scandinavian Governments Employ So Many and the United States Government So Few?
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Is it a sheer coincidence that the egalitarian Scandinavian countries have significantly larger government employment shares than the much less egalitarian United States? A positive correlation between equality and government employment share in the OECD indicates that it is not a coincidence. We suggest a nonlinear relation between equality and government employment share. The reason is that significant redistribution creates labor supply distortions, which can be mitigated by government employment, which follows decision rules that are different from those in the private sector, and by large public production. This has potentially important implications for differences in wage dispersion and unemployment among OECD countries.