Wagner's law versus displacement effect

The public sector has grown dramatically over the past few centuries in many developed countries. In this article, we use wavelet methods to distinguish between two leading explanations for this growth - Wagner's law and the displacement effect. In doing so, we use the long-term data of 10 OECD countries for a maximum time span of 1800-2009. We find that the validity of Wagner's law is likely to vary strongly over time for each country. A roughly similar feature in most of the countries is that the law is less valid in the earliest stage of economic development as well as in the advanced stages, with the validity tending to follow an inverted U-shaped pattern with economic development. Further, our results indicate that the long-run growth of government size cannot be adequately explained by Wagner's law. On the other hand, the displacement effect appears to account for the bulk of the growth in most of the countries.