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The Price of Egalitarianism

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  • Yongsung Chang

    ()
    (University of Rochester)

  • Sun-Bin Kim

    ()
    (Department of Economics, Korea University)

Abstract

We compute the welfare cost of egalitarianism - a tax policy that equalizes wages for all. The benchmark "laissez-faire" economy has features a la Aiyagari (1994) with endogenous labor supply. A progressive income tax provides insurance against income risks but at the cost of efficiency: it undermines highly productive workers' incentives to work. We find that in an economy with the labor-supply elasticity of 1, the welfare cost of egalitarianism, measured in consumption-equivalence units, is only 1% as the welfare gain from insurance against income risks nearly offsets the efficiency loss from distorting labor effort. However, with an elastic labor supply, the welfare cost of egalitarianism is as large as 7.5% of steady state consumption.

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Bibliographic Info

Paper provided by University of Rochester - Center for Economic Research (RCER) in its series RCER Working Papers with number 558.

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Length: 25 pages
Date of creation: Oct 2010
Date of revision:
Handle: RePEc:roc:rocher:558

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Postal: University of Rochester, Center for Economic Research, Department of Economics, Harkness 231 Rochester, New York 14627 U.S.A.

Related research

Keywords: Egalitarianism; Welfare Cost; Equal-Wage Policy; Income Risks.;

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  1. Josep Pijoan-Mas, 2004. "Precautionary Savings or Working Longer Hours?," 2004 Meeting Papers 350, Society for Economic Dynamics.
  2. Heathcote, Jonathan & Storesletten, Kjetil & Violante, Giovanni L., 2008. "Insurance and opportunities: A welfare analysis of labor market risk," Journal of Monetary Economics, Elsevier, vol. 55(3), pages 501-525, April.
  3. Yongsung Chang & Sun-Bin Kim, 2006. "From Individual To Aggregate Labor Supply: A Quantitative Analysis Based On A Heterogeneous Agent Macroeconomy ," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 47(1), pages 1-27, 02.
  4. Young, Eric R., 2004. "Unemployment insurance and capital accumulation," Journal of Monetary Economics, Elsevier, vol. 51(8), pages 1683-1710, November.
  5. David Domeij & Jonathan Heathcote, 2004. "On The Distributional Effects Of Reducing Capital Taxes," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 45(2), pages 523-554, 05.
  6. Yongsung Chang & Sun-Bin Kim, 2007. "Heterogeneity and Aggregation: Implications for Labor-Market Fluctuations," American Economic Review, American Economic Association, vol. 97(5), pages 1939-1956, December.
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