Market Income Inequality from Occupational Choice

This paper examines income inequality as the market equilibrium from occupational choice of individuals with differential general skills, working as employees or as entrepreneurs, with or without employees. Income inequality in the equilibrium depends primarily on the dispersion of skills in the population, on the degree of organizational scale diseconomies in the supervision function of entrepreneurs, and on the ownership distribution of capital as a production resource input. Using values of the parameter calibrated using Spanish data on the size of occupational groups, the paper identifies certain trade-offs between higher efficiency and greater income inequality from changes in the parameters of the model. The results of the analysis also question the efficiency and effectiveness of the minimum wage in reducing income inequality.