1. the gross income distribution that corresponds to the productivity distribution,
2. the net income distribution aspired by the policy maker (‘society’),
3. the actual net income distribution, resulting from taxes imposed (including e.g. the social security ‘insurance’ payroll tax) and from expenditure.
There is early recognition in the literature of the need for heterogeneous labour in discussing dynamics. For example, 20 years ago, Solow (1976:152), occasionally but not consistently using the more accurate term ‘surface’:
“George Perry, who was one of the earliest quantifiers of the Phillips surface, has recently produced an alternative explanation of great interest [reference]. Perry’s basic insight is that the aggregate unemployment rate may be an ambiguous measure of pressure in the labor market when the composition of the labor force and of the group of unemployed is changing. (...) In other words, the Phillips curve would have shifted upward. (...) Perry quantifies this observation by making the plausible assumption that an unemployed body generates downward pressure on the wage level proportional to the amount of “unemployed labor” he or she represents. In turn, the amount of unemployed labor can be measured by the number of dollars of wages it represents.”
No economist working in the field and worth his salt will have neglected Solow’s paper. Issues of the substitutionability of one kind of labour for another, and of dispersion measures for the differences in responses, can found even earlier in the literature.
Van Praag & Halberstadt (1980) present a continuous productivity distribution.
Bruno & Sachs (1985) give a standard reference for stagflation. Their formal analysis uses homogeneous labour and proportional taxes, though some of their statements allow for an interpretation of heterogeneity and nonproportionality.
The need for modelling heterogeneous labour and nonproportional taxation is clearly recognized in the literature, see e.g. Beenstock et al. (1987) and Minford & Ashton (1993). Layard, Nickell & Jackman (1991), another standard, allow for heterogeneous labour, yet tend towards proportionality in taxation.
In addition, these references use dynamics but do not explicitly discuss the consequences of changes in tax parameters. Auerbach & Kotlikoff (1987) give a wealth of information on fiscal dynamics but do not specifically tackle stagflation.