13. Inequality

This chapter focuses on policies aimed at influencing the distribution of income and wealth, applying and extending the models from previous chapters to the scale of an entire national economy. It integrates the principal-agent model of the labor market and the firm with a model of product varying levels of market competition to analyze aggregate employment, unemployment, real wages, and profit shares. This "whole economy model" allows for the derivation of a Lorenz curve and Gini coefficient to quantify income inequality.

The chapter identifies a set of parameters that can be the target of policy interventions, including the degree of competition in product markets, labor productivity, unemployment benefits, the level of the unemployment benefit, and the ease of detecting and firing a shirking worker. It also illustrates how the economy's structural characteristics determine long-run equilibrium outcomes and explores the employment effects of monopsony and the minimum wage.