A simple theory of Pareto-distributed earnings

Karl Harmenberg

Economics Letters, 2024, vol. 234, issue C

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.

Keywords: Income inequality; Pareto distribution; Extreme value theory (search for similar items in EconPapers)
Date: 2024
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Working Paper: A Simple Theory of Pareto Earnings (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecolet:v:234:y:2024:i:c:s0165176523005189

DOI: 10.1016/j.econlet.2023.111492

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