Neoclassical Production, Scarcity of Skills and Pareto Distributions

The distribution of income has been shown to be approximately Pareto and there are different mechanisms proposed in the literature that can generate such distribution. This paper shows that scarcity of skills and a neoclassical production function in labor can generate an exact Pareto distribution of earnings. The model displays a tight relationship between the Pareto shape parameter and the elasticity of substitution between labor inputs. Empirical estimates of such parameter and of the wage-elasticity of labor predict a Pareto exponent consistent with observed Pareto exponents for the US