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Is it Fair to ‘Make Work Pay’?

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  • ROLAND IWAN LUTTENS
  • ERWIN OOGHE

Abstract

We present a new fair allocation, coined a ‘Pareto‐efficient and Shared Resources Equivalent’ allocation, which compensates for different productive skills, but not for different tastes for working. We illustrate the optimal second‐best allocation in a discrete Stiglitz economy. The question of whether we should have regressive or progressive taxes for low earners crucially depends on whether the low‐skilled have a strictly positive skill or zero skill. Our simulation results suggest that ‘making work pay’ policies can be optimal, according to our fairness criterion, but only in the unreasonable case in which all the unemployed are never willing to work.

Suggested Citation

  • Roland Iwan Luttens & Erwin Ooghe, 2007. "Is it Fair to ‘Make Work Pay’?," Economica, London School of Economics and Political Science, vol. 74(296), pages 599-626, November.
  • Handle: RePEc:bla:econom:v:74:y:2007:i:296:p:599-626
    DOI: 10.1111/j.1468-0335.2006.00566.x
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    Cited by:

    1. Ramos, Xavier & Van de gaer, Dirk, 2012. "Empirical Approaches to Inequality of Opportunity: Principles, Measures, and Evidence," IZA Discussion Papers 6672, Institute of Labor Economics (IZA).
    2. Jacquet, Laurence & Van de Gaer, Dirk, 2011. "A comparison of optimal tax policies when compensation or responsibility matter," Journal of Public Economics, Elsevier, vol. 95(11), pages 1248-1262.
    3. Erwin OOGHE & Andreas PEICHL, 2010. "Fair and efficient taxation under partial control: theory and evidence," Working Papers of Department of Economics, Leuven ces10.32, KU Leuven, Faculty of Economics and Business (FEB), Department of Economics, Leuven.
    4. Alpaslan Akay & Olivier Bargain & H. Xavier Jara, 2020. "‘Fair’ welfare comparisons with heterogeneous tastes: subjective versus revealed preferences," Social Choice and Welfare, Springer;The Society for Social Choice and Welfare, vol. 55(1), pages 51-84, June.
    5. Erwin Ooghe & Andreas Peichl, 2015. "Fair and Efficient Taxation under Partial Control," Economic Journal, Royal Economic Society, vol. 125(589), pages 2024-2051, December.
    6. Roland Hodler, 2009. "Redistribution and Inequality in a Heterogeneous Society," Economica, London School of Economics and Political Science, vol. 76(304), pages 704-718, October.
    7. André Decoster & Peter Haan, 2015. "Empirical welfare analysis with preference heterogeneity," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 22(2), pages 224-251, April.
    8. Xavier Ramos & Dirk Van de gaer, 2012. "Empirical approaches to inequality of opportunity: Principles, measures, and evidence," Working Papers 259, ECINEQ, Society for the Study of Economic Inequality.
    9. Giacomo Valletta, 2009. "A fair solution to the compensation problem," Social Choice and Welfare, Springer;The Society for Social Choice and Welfare, vol. 32(3), pages 455-478, March.
    10. Giacomo Valletta, 2014. "Health, fairness and taxation," Social Choice and Welfare, Springer;The Society for Social Choice and Welfare, vol. 43(1), pages 101-140, June.

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    More about this item

    JEL classification:

    • D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation

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