Is There a Policy of Optimal Wage and Income Differentiation?

In this paper, we address the question of optimal wage and income dispersion in a growing economy. If already in the two-persons-case we have to deal with the fact of different marginal products of labor, there are two solutions in principle. Either two different wages are paid (at unanimous hours of working) according to these differences, or the good worker would have to work longer than the bad worker so as to equilibrate their marginal products (paying the same wage per hour). In the following parts of the paper, we limit our scope to the issue of wage/income, avoiding dealing with working hours differentiation. Furthermore, we argue on the macroeconomic level. Assuming a log-normal distribution of incomes, we determine the optimal degree of inequality and rate of per capita income growth from a model which integrates Okun’s law with a social welfare function (with the Gini coefficient and the per capita growth rate as arguments) and a trade off relationship between equity and per capita growth. It is shown that modern industrial economies tend to have an “egalitarian bias” being most likely responsible for a considerable part of European unemployment.