EGALITARIANISM AND GROWTH

Are competitive wage premia an obstacle to growth? The answer of the a rchitects of the Scandinavian ''model'' in the 1950s and 1960s was in the affirmative. By punishing expansive and growth enhancing sectors o f the economy, competitive wage premia imposed 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 econ omy cases. We also show that egalitarian pay compression, combined wit h active labor market policies, works in the same way as an industrial policy of subsidizing sunrise industries.