Scandinavian Working Papers in Economics
Working Papers,
Copenhagen Business School, Department of Economics
No 21-2020: A Simple Theory of Pareto Earnings
Karl Harmenberg ()
Additional contact information
Karl Harmenberg: Department of Economics, Copenhagen Business School, Postal: Copenhagen Business School, Department of Economics, Porcelaenshaven 16 A. 1. floor, DK-2000 Frederiksberg, Denmark
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
11 pages, December 22, 2020
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