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Simulated Economy Explores Wage Inequality

Published on Wed Aug 23 2023 by Dustin Van Tate Testa article cover photo Rich vs Poor Mindset | Marco Verch Professional Photographer on Flickr

A new paper titled "Wages and Utilities in a Closed Economy" proposes a mathematical model that explores the causes of wage inequality and its relationship to consumption choices, production technologies, and labor composition in an economy. The model, known as the Simple Closed Model (SCM), focuses on closed economies where consumption and production are separate but interconnected. By analyzing consumer preferences and their impact on wages, the researchers show that consumer choice can be a powerful tool for wage redistribution.

The paper addresses two pressing problems in the current global economy: the scarcity of "good" jobs and the rising inequality in wage incomes. The authors construct the SCM Model, which consists of the production sector, determined by a technology matrix, and the consumption sector, modeled as a Fisher market and a utility matrix. The model reveals the connection between consumer preferences, prices of goods, production, and wages.

The research also highlights the potential impact of consumer choice on wage distribution. By manipulating the utility matrix, consumers can alter wages and potentially improve social and relative welfare for certain classes. The authors demonstrate this through the formulation of a consumer choice game, where consumer preferences are used as strategies and wages as pay-offs.

The paper draws inspiration from existing economic models, including the Arrow-Debreu model and the Fisher model, and expands on their theories to incorporate the interplay between production and consumption. It also references studies on the effects of technology on wages and the strategic manipulation of market equilibria.

The authors emphasize the practical implications of their findings. Understanding the connection between consumer choice and wages can help wage-earners adapt their consumption patterns to support a more equitable distribution of wages. The research also sheds light on the pricing of everyday goods and the importance of supporting small-branded and local/regional players to ensure better wages.

Looking ahead, the authors suggest further research is needed to develop computational algorithms to compute equilibria in the SCM model and strengthen the tatonnement process. Additionally, more studies on the existence of Nash equilibria in markets with varying parameters, such as technology and labor composition, are warranted.

Overall, this paper provides valuable insights into the relationship between consumer choice, wages, and market equilibria in closed economies. Its findings have important implications for understanding wage inequality and the potential for consumer choice to drive wage redistribution.

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