When Higher Incomes Reduce Welfare: Queues, Labor Supply, and Macro Equilibrium in Socialist Economies

Abstract

Starting from a micro model of consumer behavior under rationing by queuing that utilizes Gary Becker's Allocation of Time framework, we develop a simple macroeconomic model of a socialist economy. The length of the queue is the key endogenous variable that equilibrates aggregate supply and aggregate demand. Comparative statics analysis shows that an increase in wages over money prices brings about longer queues that reduce labor supply, output, and welfare. When shortages grow beyond a certain critical level, queues fail to sustain aggregate equilibrium in the economy.