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The Price of Egalitarianism

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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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  • Yongsung Chang & Sun-Bin Kim, 2010. "The Price of Egalitarianism," RCER Working Papers 558, University of Rochester - Center for Economic Research (RCER).
  • Handle: RePEc:roc:rocher:558
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    Cited by:

    1. Athreya, Kartik B. & Romero, Jessica Sackett, 2015. "Land of Opportunity: Economic Mobility in the United States," Economic Quarterly, Federal Reserve Bank of Richmond, issue 2Q, pages 169-191.

    More about this item

    Keywords

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

    JEL classification:

    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
    • J3 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs

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