The Break of the Linkage between Monetary Incentives and Effort

Abstract

The average worker in the US needs to work more than a year to earn his or her CEO’s daily wage. The well-accepted justification among economists for these huge wage gaps is the necessity to achieve economic efficiency, in terms of efficient allocation in the labor market and incentivizing employees to put forth maximum effort. Building on the idea that the level of effort any individual can invest is bounded, we provide a compact mathematical proof that challenges the well-accepted economic notion that extremely high gaps in net wages and wealth distribution are the lesser evil because they ensure economic efficiency. We conclude suggesting an economically efficient solution that does not limit gross wages, but still reduces socioeconomic inequalities.