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Is it Fair to 'Make Work Pay'?

  • ROLAND IWAN LUTTENS
  • ERWIN OOGHE

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. Copyright (c) The London School of Economics and Political Science 2007.

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Article provided by London School of Economics and Political Science in its journal Economica.

Volume (Year): 74 (2007)
Issue (Month): 296 (November)
Pages: 599-626

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Handle: RePEc:bla:econom:v:74:y:2007:i:296:p:599-626
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