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Erscheinungsjahr: 
2010
Schriftenreihe/Nr.: 
Discussion Papers No. 10-05
Verlag: 
University of Bern, Department of Economics, Bern
Zusammenfassung: 
We explore how the underemployment problem of less-developed economies is related to income inequality. Our crucial assumption is that consumers have non-homothetic preferences over differentiated products of formal-sector goods and thus that inequality affects the composition of aggregate demand via the price-setting behavior of formal-sector firms. We find that (i) high inequality divides the formal sector into mass producers (which charge low prices that are within the reach of the poor) and exclusive producers (which charge high prices and sell only to the rich); (ii) high inequality generates an equilibrium where many workers are crowded into the informal economy; and (iii) an increase in subsistence productivity raises the wages of unskilled workers and boosts employment due to the higher purchasing power of poorer households.
Schlagwörter: 
income distribution
monopolistic competition
mark-ups
exclusion
JEL: 
E25
D30
D42
L16
E24
Dokumentart: 
Working Paper

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