How Productive Are Government Activities? Evidence from a Sample of OECD Countries

This paper estimates the productivity of government and private employment, and government and private capital for a panel of 23 OECD economies over the 1960-2004 period. A simple theoretical model shows that government employment and capital are optimally provided when their marginal products equal those of the private inputs. The paper’s empirical results find that (i) the output elasticity of private employment is six to seven times higher than government employment’s, (ii) neither the difference between the marginal products of private and government employment, nor the difference between the marginal products of private and government employment is statistically significant, so that both government employment and government capital can be characterized as optimally provided, and (iii) in most of the countries examined, government workers continue to be overpaid in the sense that the government/private wage ratio exceeds the corresponding ratio of marginal products.