Using Baumol’s model of unbalanced growth, this study has attempted to empirically analyze whether the rising costs of public services is responsible for the increases in public sector spending. To this end, using panel data for the 25 OECD member nations for the period from 1990 to 2010, we have estimated the effects of the increases in production cost of public services on the increases in public sector spending. Four areas of public spending were selected for analysis: education, health care, public order and safety, and social welfare. Feasible Generalized Least Squares were used in order to eliminate heteroscedasticity and autocorrelation observed in the first OLS regression. The main findings are summarized as follows. First, the per capita real wage growth was found to have significant positive (+) effects on spending on education, health care, public order and safety, and the growth rate of real expenditure in the field of social welfare. Also, the coefficients were seen to be high, suggesting that the impact of wage increases is very large. Second, the per capita real GDP growth was seen to have no significant effects on any of this spending, except for social welfare spending, and the coefficients were found to show values close to zero. In social welfare spending, the per capita real GDP growth was found to have significant negative (-) effects. This result seems attributable to the fact that social welfare spending includes cash payments such as low-income cost of living support and unemployment benefits. In sum, these findings, as illustrated in Baumol's model, support the claim that rises in the costs of production of public services have large effects on increases in public sector spending.