EGALITARIAN WAGE POLICIES AND LONG-TERM UNEMPLOYMENT

How does a centrally imposed egalitarian wage policy affect unemployme nt, when workers differ with respect to productivity? The effect on to tal unemployment is found to be ambiguous. Egalitarian wages encourage job creation because increased profits derived from the most producti ve workers more than outweigh reduced profits derived from the least p roductive workers. Short-term unemployment is reduced. On the other ha nd, firms respond by raising their reservation productivity. Some work ers are left almost completely unemployable. Long-term unemployment ri ses. Less inequality in the wage distribution is obtained at the expen se of more inequality in the distribution of unemployment.