The Optimal Inequality of Earnings – the Econometric Analysis

Abstract

Our aim is to build an econometric model of growth, in which we will try to estimate the optimum inequality of earnings. By optimum we understand such an inequality of earnings with which the rate of the GDP growth will be the highest. The calculation of the optimum inequality of earnings will be possible by means of the introduction of a variable into the model – the inequality of earnings in a parabolic shape.
We adopted hypothesis that the optimum inequality of earnings exists. If the inequality of earnings is smaller than the optimum one, the most creative, hard working and efficient individuals are not sufficiently paid and motivated to use their abilities in the production process of the GDP. If the inequality of earnings is higher than the optimum one, workers with lower qualifications receive a low pay, which is accompanied by the sense of injustice or even sometimes of exploitation. The sense of injustice and exploitation threatens human bonds, limits trust and social capital. Only the financial factor is a motivations to efficient work. However, there is a lack of full, creative engagement of numerous employees earning below the average pay.
An empirical analysis was conducted for the Polish economy between 1980 and 2004.

Our initial estimation shows that since 1996 the inequality of earnings has been higher than the optimum one and it has been increasing gradually. The greatest setback of the GDP growth caused by an excessive inequality of earnings took place in 2003 and 2004, when it exceeded one half of one percentage point. The outcome seems overestimated unless we assume that the variable represents not only itself but also other variables, for instance the crime rate.
What sense does an optimum inequality of earnings estimated in such way have? As we believe this is the optimum inequality in the sense of the social consciousness and the social sense of justice. If the inequalities in earnings of the most educated and efficient and the least educated and efficient correspond with the social sense of justice then it is the easiest way for a good co-operation, the reinforcement of social bonds, trust and social capital. So it is the inequality of earnings optimum in the sense of the provision of the best social co-operation in the generation of GDP.
We are of the opinion that a similar attitude may be applied in search of the regional optimum GDP per capita inequality, the optimum one in the sense of the maximum increase of the whole country’s GDP growth. Similarly one may search for the optimum GDP inequality per capita in a group of countries, such an inequality with which the whole group maximizes its pace of economic growth.