Baumol's law

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The assertion that over time the public sector will increase as a proportion of the economy. The basic hypotheses driving this result are that the public sector (i) is labour-intensive relative to the private sector, and (ii) cannot increase productivity by substituting capital for labour. For example, hospitals need a minimum number of doctors per patient. The labour market links public and private sector wages, so wage increases in the private sector become cost increases for the public sector. If public sector and private sector output remain in the same proportion, public sector expenditure must rise as a proportion of total expenditure.

Subjects: Economics.

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