A Simple Theory of Pareto Earnings

Karl Harmenberg

No 21-2020, Working Papers from Copenhagen Business School, Department of Economics

Abstract: I introduce a simple model which endogenously generates a Pareto distribution in top earnings, consistent with empirics. Workers inhabit different niches, and the earnings of a worker is determined by the niche-specifc supply of labor and a constant-elasticity 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 distribution of workers over niches satisfies a regularity condition from extreme-value theory, satisfied by virtually all continuous distributions in economics.

Keywords: Wage differentials; Labor markets; Earnings; Pareto distribution (search for similar items in EconPapers)
JEL-codes: J31 J40 (search for similar items in EconPapers)
Pages: 11 pages
Date: 2020-12-22
New Economics Papers: this item is included in nep-ore
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Journal Article: A simple theory of Pareto-distributed earnings (2024)
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