One big question that runs through my research is the contraposition of wage inequality and wage equality. At first, it seems like a very simple, nearly trivial point. Let me expand on it.
We all know that wages, by employer's request, have the tendency to move towards marginal productivity. However difficult to calculate, the difference between a brilliant order of one engineer and a stupid order of another one is more important than between a brilliant operation of one manual worker and a stupid operation of another worker. Hence, the good engineer gets paid a lot. This is in accordance with the demand for bright people in management, while manual workers have a whole army of unemployed equally unschooled workers that cause a surplus offer. Therefore, for each segment in the workforce, there is an optimal wage.
Ever since
2006, however, the world has discovered externalities. Externalities come in between seemingly Pareto efficient deals, such as the one discribed above. Would it be possible that two segments in the workforce are both better off if government intervenes?
Wilkinson & Pickett believe so: inequality has a price. That price is to be paid by all, also by the rich. In so far that the underclass or precariat causes trouble, this price goes up. This is no moral position at all, I confess, but it may be a very convincing one. The upper segments will profit from having a lower wage, if it smoothens differences in society. Of course, the underclass gets leveled up, which may equally improve happiness and even provide chances for development. In the end, there will be a Pareto efficient equilibrium in some degree of wage inequality way less than the one based on marginal productivity.
Now there is a paradoxical complication in this reasoning: what is the optimal choice when the underclass causes trouble. One can suppress the consequences or the causes, and be indifferent between both options. For example, the upper class can demand a higher wage to compensate for increasing insecurity and the need to have private surveillance. This will actually be the first idea from a free riding micro perspective. It will fail for two reasons:
- The need to be surrounded by guards implies the cost of individual freedom in all cases. In a way, one could however still say that one can be bribed to accept this cost.
- Wages rise far above marginal productivity, which should be compensated by wages far below marginal productivity for lower skilled workers. This will however create ever more trouble, so that this solution is not stable.
In my view, therefore, there is a rational foundation for more equality, which may be the subject of specification in further research. I hope social sciences one day will be able to bring one and one together on this matter.
