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Is it Fair to ‘Make Work Pay’?
Author(s) -
LUTTENS ROLAND IWAN,
OOGHE ERWIN
Publication year - 2007
Publication title -
economica
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.532
H-Index - 65
eISSN - 1468-0335
pISSN - 0013-0427
DOI - 10.1111/j.1468-0335.2006.00566.x
Subject(s) - work (physics) , pareto optimal , economics , pareto principle , microeconomics , zero (linguistics) , optimal allocation , labour economics , computer science , set (abstract data type) , operations management , mathematical optimization , mathematics , mechanical engineering , linguistics , philosophy , engineering , programming language
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.