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We are grateful to Tarja Papavassiliou for computational assistance.
In fact, Wagner’s law is also not supported by cross-section evidence from developed countries.
Similar implications of the Baumol model as applied to the progressive and stagnant service sectors in an economy are discussed in Baumol, Blackman, and Wolff (1985).
The authors also found that, broadly speaking, the more advanced countries or regions within each of the OECD and developing country groupings had lower relative public sector wages: 1.5 in Sweden and Canada compared to 2.5 in Ireland; 1.2 in Singapore compared to 15.1 in Burundi; and 2.9 in Asia and Latin America compared to 6.1 in Africa.
The accumulation of physical capital also tends to correlate positively with income. However, choosing human over physical capital as the second factor of production, in addition to its conceptual relevance, simplifies substantially the analytics of the model by abstracting from the need to consider the determination of intersectoral allocations of capital in addition to that of labor, since human capital could take the form of a public good (see below). Also, there is no presumption that the government sector is more physical-capital intensive than the private sector.
As noted earlier, the term “human capital” in the present model is used to denote the general education level of the labor force, and not the level of job-specific labor skills. On average, the general education level of a worker in the government sector tends to be higher than that of a worker in the private sector in most countries but especially in poor countries.