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

TY - UNPB

T1 - New Evidence on the Historical Growth of Government in Europe: The Role of Labor Costs

AU - Melki, Mickael

AU - Pickering, Andrew Christopher

PY - 2019/5

Y1 - 2019/5

N2 - 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.

AB - 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.

M3 - Discussion paper

VL - 19

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

PB - Department of Economics and Related Studies, University of York

ER -