Public employees' preferences and the size of the public sector

Abstract

This paper examines the circumstances under which public employees will regard public sector expansion as welfare-improving. A model is proposed which incorporates a number of features not previously included in analyses of public sector growth, including interactions between private and public production in the form of government externalities and tax incentive effects. The outcome for public employees' welfare is shown to depend on the size of, and response to, the marginal tax rate, the extent of government externalities, public and private sector production elasticities, public employees' consumption elasticity, and the current public employment share. Also, unlike previous models, it is not found that public employees necessarily prefer a larger public sector compared with individuals in the private sector.