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New Evidence on the Historical Growth of Government in Europe: The Role of Labor Costs

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JournalEuropean Journal of Political Economy
DateAccepted/In press - 23 May 2019
DateE-pub ahead of print - 7 Jun 2019
DatePublished (current) - Sep 2019
Number of pages16
Pages (from-to)445-460
Early online date7/06/19
Original languageEnglish


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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© 2019 Elsevier B.V. This is an author-produced version of the published paper. Uploaded in accordance with the publisher’s self-archiving policy.

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