Academic journal article Atlantic Economic Journal

A Test of the Baumol Model of Unbalanced Growth

Academic journal article Atlantic Economic Journal

A Test of the Baumol Model of Unbalanced Growth

Article excerpt

A Test of the Baumol Model of Unbalanced Growth

It is well-known that the public sector of the United States has grown rapidly in hte decades since World War II. This growth is evident whether it is measured by total government expenditures, government purchases of goods and services, governmental regulation, or employment in the public sector.

A rather early theoretical explanation of this growth phenomenon was advanced by Baumol [American Economic Review, 1967]. His model of "unbalanced growth" concluded that the average cost of providing government services would tend to increase without limit primarily because wages would increase by a proportionately greater amount than labor productivity within the public sector. Baumol argued further that little if anything could be done to arrest this trend, and thus a larger amount of society's resources must be devoted to the government sector.

This paper reports preliminary results of a test of the Baumol hypothesis. The primary objectives are two: (1) to define and measure the output, productivity, and wage rate within a representative government sector; and (2) to determine if wage gains there exceed the gains of labor productivity, as the critical assumption of the model contends.

The public sector employment or service chosen is public welfare; more specifically, the Department of Welfare in the State of West Virginia is examined. …

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