Taxes Matter XIV: Government Employment is Bad for Economic Growth


Today, MHPC released a new study on state government employment that finds Maine has too many state jobs when compared to the national average. The obvious problem is that Maine taxpayers are on the hook for this bloated bureaucracy to the tune of over $200 million. Less obvious is that government employment is bad for economic growth.
A recent article published in The Review of Economics and Statistics, November 2006 (non-gated version found here), found that: “We find a negative and statistically significant partial correlation between the percentage of the population employed in the public sector and the rate of growth, regardless of whether one considers federal, state, or local government. Moreover, we find no clear pattern of a less negative partial correlation at increasingly decentralized levels.” Put simply, not only is government employment in general bad for economic growth, but it doesn’t matter if it is at the federal, state or local level–it is all equally bad.
The authors go on: “However, the relationship might be nonlinear; for example, government might be good to a certain extent, but then become a negative influence as it expands further . . . [but] for federal, state, and local government variables entered linearly, the estimates are negative and significant, as in the original regressions.” In other words, government employment is also bad for growth no matter the size of government.
In another unpublished paper, found here, the authors study the role of government employment in more detail. They conclude: “Given the ostensible goals of higher growth and/or more equitable distribution of income, our findings are not supportive of expanding the roles of government, in terms of employment, at any level. The U.S. government use of the labor force seems to be either unproductive or growth-hindering at all three levels of decentralization. Taken at face value, our findings seem to suggest for a rolling back of government activities; specifically for a release of government-employed labor inputs to the private sector.”