Figure 35: Edgeworth-Bowley Diagram

Tables

The following tables give the numerical outcomes of the two regimes. When M is binding, the subsistence workers l are unemployed and dependent on a benefit. Since they do not work, output and social welfare are lower. Though there is no explicit social security in this model, we however can presume that part of earnings of the workers is channeled to the unemployed, leaving consumption from those earnings unaffected.

The social optimum is found as in Table 9. The associated allocations are in Table 10 - left and right side. When you compare the two regimes, please note that the prices are normalised per regime to a unit price for the sheltered sector, and thus are not comparable over regimes.

Table 9: Utility, production and national income for two regimes

Utility level

National income

Product prices
Sheltered & exposed

Production
S & E

With l

21.20

39.67

1

0.9579

24.93

15.38

Without l

18.16

32.37

1

0.840

20.74

13.85

Note: All prices are scaled so that the product price of the sheltered sector = 1.
This is also done per regime, so that the price levels over the regimes are not comparable.

In Table 10 we see that the share of the highly productive in national income rises. Most of the share of the l go to the m, but this is generally viewed as an internal redistribution, and most attention goes to the share of ‘the rich’.

Table 10: Allocations