Specialization of Labor and the Distribution of Income

We analyze a model in which workers must be allocated to tasks to produce. There are differences among the workers in absolute ability that are independent of the activity they perform. We demonstrate a unique competitive equilibrium that determines both wages and the allocation of workers to tasks. The equilibrium wage has the property that workers assigned to the lowest ‘‘value-added’’ tasks will receive a ‘‘premium’’ above their identifiable contribution to value simply for filling these least valuable positions. We examine how the equilibrium wage function changes as the production process becomes more specialized and the division of labor increases. Journal of Economic Literature Classification Numbers: D31, D33, J31. 2000 Academic Press