Public Employees And GDP: The Noga Curve

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By George Noga
More Liberty, Less Government

The Rahn and Laffer Curves, Hauser’s Law, and ETI previously have graced this space; the eponymous Noga Curve is the capstone to this sequence. I have taken the liberty, perhaps immodestly, of naming the curve to achieve my Warholian 15 minutes of notoriety.

Insofar as I know, correlating the ratio of public to total employment with GDP growth rates never before has been done and hence breaks new ground.

 Hauser’s Law, the Laffer Curve and ETI (Elasticity of Taxable Income) prove that an increase in tax rates does not result in more tax revenue. The Rahn and Noga curves are different ways to correlate the size of government with economic growth; they both show that more government results in economic stagnation.

 

 

 

 My Eureka moment for the curve came while reading about the recent crisis in Egypt and noting over 30% of working Egyptians were government employees. That led me to ponder if any economy that besotted with public employees stood a chance to prosper. The short answer is “no”. Yes, Scandinavia has the same 30%, but achieved prosperity long before its public rolls swelled. Regardless of what happens with its government, the Egyptian economy will remain torpid until public employment contracts by nearly 70% – not too likely, huh?The Noga Curve shows that GDP grows at a rapid clip (6% average) until it hits a ratio of 10% of government to total workers as in South Korea, China, Brazil, Turkey and Singapore. Once public employment exceeds 10%, economic growth plunges. The USA with 16%-17% public employment is growing at only 2.5%; Europe with 20% is growing at 1.7% while Scandinavian countries with 30% government workers grow at 1.5%.

“The Noga Curve demonstrates a strong negative correlation between the share of government to total employees and the rate of economic growth.”

Many statist countries have severe bloat with public sectors over 50% and some near 60%. All such nations have no growth or even negative growth, i.e. contraction. This includes nearly all of Arabia, Africa, Latin America, South America and any country ending in stan.

I researched the data as best I could although it may not rise to the level of a peer-reviewed economic journal. GDP growth rates were taken for the past 20 years from the IMF and the CIA Factbook; more weight was given to recent years. Employment data were sourced from the OECD and the International Labour Office (Geneva). Data for many individual countries were obtained on the Internet. Exceptions needed to be made for countries with natural resource wealth and other anomalies. Europe is based on an average with variation between individual states. High GDP growth countries also are based on an average as, for example, China has been growing much more than 6%.

“The real class war in America today is not between rich and poor; it is between government employees and those who must pay the bill.”

Despite the limitations in the data, the picture the curve portrays is hard to ignore. It seems abundantly clear that as government employs more than 10% of the work force, economic growth plummets. The more government employs, the more it plummets. The reasons are not hard to plumb. Government does not create wealth; it transfers or destroys it. The more people government employs, the fewer remain to support them. Finally, government workers create obstacles for economic growth through excessive regulation and bureaucracy. The real class war in America today is not between rich and poor; it is between government employees and those who pay the bill!

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