How Much Income Inequality Is Too Much?

11 Pages Posted: 13 May 2020

Date Written: May 13, 2020

Abstract

We propose a highly schematic economic model in which, in some cases, wage inequalities lead to higher overall social welfare. This is due to the fact that high earners can consume low productivity, non essential products, which allows everybody to remain employed even when the productivity of essential goods is high and producing them does not require everybody to work. We derive a relation between heterogeneities in technologies and the minimum Gini coefficient required to maximize global welfare. Stronger inequalities appear to be economically unjustified. Our model may shed light on the role of non-essential goods in the economy, a topical issue when thinking about the post-Covid-19 world.

Keywords: Income distribution, Wage inequalities, Gini coefficient, Involuntary unemployment

JEL Classification: E24, E25, O40

Suggested Citation

Bouchaud, Jean-Philippe, How Much Income Inequality Is Too Much? (May 13, 2020). Available at SSRN: https://ssrn.com/abstract=3599923 or http://dx.doi.org/10.2139/ssrn.3599923

Jean-Philippe Bouchaud (Contact Author)

Capital Fund Management ( email )

23 rue de l'Université
Paris, 75007
France
+33 1 49 49 59 20 (Phone)

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