Egalitarianism and Growth

Abstract

Are competitive wage premia an obstacle to growth? The answer of the architects of the Scandinavian "model" in the 1950s and 60s was in the affirmative: By punishing expansive and growth enhancing sectors of the economy competitive wage premia put an unwarranted drag on the rate of structural change. We formalize this intuition using a two sector endogenous growth model, considering both open and closed economy cases. We also show that egalitarian pay compression, combined with active labor market policies, works exactly in the same way as an industrial policy of subsidizing sunrise industries.

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