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A simple theory of Pareto-distributed earnings

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  • Harmenberg, Karl

Abstract

I introduce a simple model which endogenously generates a Pareto distribution in top earnings. Workers inhabit different niches, and the earnings of a worker is determined by the niche-specific supply of labor and a downward-sloping labor demand curve. The highest paid workers are the ones that inhabit a niche with few other workers. A Pareto tail in earnings emerges as long as the labor demand curve has a limit elasticity and the distribution of workers over niches satisfies a regularity condition from extreme-value theory, satisfied by virtually all continuous distributions in economics.

Suggested Citation

  • Harmenberg, Karl, 2024. "A simple theory of Pareto-distributed earnings," Economics Letters, Elsevier, vol. 234(C).
    • Handle: RePEc:eee:ecolet:v:234:y:2024:i:c:s0165176523005189
    DOI: 10.1016/j.econlet.2023.111492
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    More about this item

    Keywords

    Income inequality; Pareto distribution; Extreme value theory;
    All these keywords.

    JEL classification:

    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J40 - Labor and Demographic Economics - - Particular Labor Markets - - - General

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