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A New Model of Wage Determination and Wage Inequality

Author

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  • Jasso, Guillermina

    () (New York University)

Abstract

This paper proposes a new model of wage determination and wage inequality. In this model, wage-setters set workers' wages; they do so either directly, as when individuals vote in a salary committee, or indirectly, as when political parties, via the myriad of social, economic, fiscal, and other policies, generate wages. The recommendations made by wage-setters (or arising from their policies) form a distribution, and all the wage-setter-specific distributions are combined into a single final wage distribution. There may be any number of wage-setters; some wage-setters count more than others; and the wage-setters may differ among themselves on both the wage distribution and the amounts recommended for particular workers. We use probability theory to derive initial results, including both distribution-independent and distribution-specific results. Fortuitously, elements of the model correspond to basic democratic principles. Thus, the model yields implications for the effects of democracy on wage inequality. These include: (1) The effects of the number of wage-setters and their power depend on the configuration of agreements and disagreements; (2) Independence of mind reduces wage inequality, and dissent does so even more; (3) When leaders of democratic nations seek to forge an economic consensus, they are unwittingly inducing greater economic inequality; (4) Arguments for independent thinking will be more vigorous in small societies than in large societies; (5) Given a fixed distributional form for wages and two political parties which either ignore or oppose each other's distributional ideas, the closer the party split to 50-50, the lower the wage inequality; and (6) Under certain conditions the wage distribution within wage-setting context will be normal, but the normality will be obscured, as cross-context mixtures will display a wide variety of shapes.

Suggested Citation

  • Jasso, Guillermina, 2008. "A New Model of Wage Determination and Wage Inequality," IZA Discussion Papers 3850, Institute for the Study of Labor (IZA).
  • Handle: RePEc:iza:izadps:dp3850
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    References listed on IDEAS

    as
    1. Boyes, William J & Happel, Stephen K, 1989. "Auctions as an Allocation Mechanism in Academia: The Case of Faculty Offices," Journal of Economic Perspectives, American Economic Association, vol. 3(3), pages 37-40, Summer.
    2. Guillermina Jasso & Samuel Kotz, 2007. "A new continuous distribution and two new families of distributions based on the exponential," Statistica Neerlandica, Netherlands Society for Statistics and Operations Research, vol. 61(3), pages 305-328.
    3. E. Roy Weintraub, 1992. "Introduction," History of Political Economy, Duke University Press, vol. 24(5), pages 3-12, Supplemen.
    4. Chipman, John S & Moore, James C, 1980. "Real National Income with Homothetic Preferences and a Fixed Distribution of Income," Econometrica, Econometric Society, vol. 48(2), pages 401-422, March.
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    More about this item

    Keywords

    shifted mirror-exponential distribution; shifted general Erlang distribution; wage-setter; power; consensus; independence of mind; dissent; form of government; probability distributions; shifted exponential distribution; Gini coefficient;

    JEL classification:

    • C02 - Mathematical and Quantitative Methods - - General - - - Mathematical Economics
    • C16 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Econometric and Statistical Methods; Specific Distributions
    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • D6 - Microeconomics - - Welfare Economics
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials

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