On the theory of equalizing differences; Increasing abundances of types of workers may increase their earnings

Abstract

The theory of equalising differences recognises that wage differentials may be required to equalise the attractiveness of alternative occupations. We examine this theory using the Conley/Wooders 'crowding types' model. The crowding types model distinguishes between the tastes of a player and his crowding type, those attributes of the player that directly effect the well-being of other players in the same club - a player's skill, productivity or personality are examples. A club can be interpreted as firm in which the job attributes are the club goods; thus, the crowding types model, with its distinction between tastes and crowding types, provides a natural environment in which to study equalising differences. In contrast to results for earlier models, we demonstrate that even when small groups of players are strictly effective in a strong sense, an increase in the abundance of players of one crowding type can increase the core payoffs to players of that crowding type.