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This paper asks: What is the effect of government policy on output and inequality in an environment with education and labor-supply decisions? The answer is given in a general equilibrium model, consistent with the post 1960s facts on male wage inequality and labor supply in the U.S. In the model, education and labor-supply decisions depend on progressive income taxation, the education system, the social security system, and technology-driven wage differentials. Government policies affect output and inequality through two channels. First, a policy change leads to an asymmetric adjustment of working hours and savings of schooled and unschooled individuals. Second, there is a redistribution of the workforce between schooled and unschooled workers. Using a battery of proposed government policies, we demonstrate that skill redistribution dampens the response of wage inequality to a policy change and amplifies the response of output by an additional 1 to 2 percent.

The rapid growth in size and strength of the trade union movement has been one of the most revolutionary developments on the North American continent during the past ten to fifteen years. The very size and scope of this movement, and the tremendous impact which it has had on the national economies of the United States and Canada, have given rise to widespread agitation for greater governmental intervention and control in industrial relations.This agitation has created a serious dilemma. There is as yet no clear and consistent body of principles by which to determine in what manner and to what degree governments should seek to regulate labour-employer relations. There is little agreement as to what the primary objective of governmental policy should be. Should it concentrate on reducing strikes and lockouts to the absolute minimum? Or (which is not the same thing by any means) should it be concerned primarily with encouraging collective bargaining as a means of achieving stable and harmonious day-to-day relations? Should it seek to bring about an exact "balance of power" between organized labour and employers by an equal distribution of legal privileges to and equal restrictions upon each party? Or is its primary duty to protect the rights and liberties of individuals against the possible abuse of power by either or both parties?

This paper illustrates two reasonable political decision mechanisms by which fiscal policy generates endogenous growth under a constant returns to scale production technology, absent externalities. Based on the dynamics induced by various policy choices, we demonstrate that policies that maximize capital deepening generate balanced growth and are Pareto optimal. In contrast, policies chosen by the median voter produce balanced growth, but are suboptimal.