How Much Income Inequality Is Too Much?
11 Pages Posted: 13 May 2020
Date Written: May 13, 2020
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: Suggested Citation