5. wages and the distribution of income. labour market trends shift from agricultural and...

5. Wages and the Distributionof Income

Labour Market TrendsLabour Market Trends

• Shift from agricultural and manufacturing to service-sector employment


0

5

10

15

20

1890 1900 1910 1920 1930 1939 1950 1960 1970 1980 1990 2000

Mill

ions

Agriculture

Mining, energy and construction

Manufacturing

Services

Employment in different sectors of the UK economy



• Rise in part-time employment






• Rise in female participation rates








• Rise in temporary employment










• Downsizing





• Downsizing

Wage Determination in a Perfect MarketWage Determination in a Perfect Market

• Perfect labour markets– everyone is a wage taker

– freedom of entry

– perfect knowledge

– homogeneous labour

• Market equilibrium

• Perfect labour markets– everyone is a wage taker

– freedom of entry

– perfect knowledge

– homogeneous labour

• Market equilibrium

Sall workers

in the market

Dall firms

in the market

O

Labour hours

Ho

urly

wa

ge

Wm

A labour market: whole market

Dindividual employer

O

Labour hours

Ho

urly

wa

ge

Q1

Wm

Slabour

A labour market: individual employer

O

Labour hours

Ho

urly

wa

ge

Q2

Wm

Dlabour

Sindividual worker

A labour market: individual worker


• The supply of labour– why upward sloping

– the position of the supply curve• the number of qualified people

• non-wage benefits

• desirability of alternative jobs

• Elasticity of supply of labour– the mobility of labour

• The supply of labour– why upward sloping

– the position of the supply curve• the number of qualified people

• non-wage benefits

• desirability of alternative jobs

• Elasticity of supply of labour– the mobility of labour


• The demand for labour: marginal productivity theory– the profit-maximising approach

– the marginal cost of labour (MCL)

– the marginal revenue product of labour (MRPL)

• The demand for labour: marginal productivity theory– the profit-maximising approach



OQ of labour

Out

put

MPPL

x

Marginal physical product of labour curveMarginal physical product of labour curve

Diminishing returnsset in here


• The demand for labour: marginal productivity theory

– the profit-maximising approach



– the profit-maximising level of employment for a firm






O

£

Wm

MCL= W

QeQ of labour

MRPL

The profit-maximising level of employmentThe profit-maximising level of employment

MRPL = MPPL × Pgood







– derivation of the firm’s demand curve for labour






– derivation of the firm’s demand curve for labour

O

Q of labour

£

MRPL

W1 MCL1

Q1

MCL2W2

MCL3W3

Q2 Q3

a

b

c

Deriving the firm’s demand curve for labour

Profits maximisedwhere MRPL = MCL

D

O

Q of labour

£

W1 MCL1

Q1

MCL2W2

MCL3W3

Q2 Q3

a

c

Deriving the firm’s demand curve for labour

The MRPL curve tracesout the demand curve

b


• Wages and profits under perfect competition

• Wages and profits under perfect competition

O

MCL = W

Surplus for firmSurplus for firm

WagesWages

W

QeQ of labour

£

MRPL

Wages and profitsWages and profits


• Power in labour markets

• Firms with monopsony power in employing labour– MCL > W



O

Q of labour

£

MRPL

ACL W (supply curve)

MCL

Monopsony




– effects on wages and employment




O

Q of labour

£

MRPL

ACL W (supply curve)

Q1

MCL

Monopsony

W1

Q2

W2

Wage Determination inImperfect Markets





• Unions with monopoly power




• Unions with monopoly power






• Unions with monopoly power– unions facing competitive employers









– effects of wage increases on employment





– effects of wage increases on employment



O Q of labourQ1

W1

S

D

£

W2

Q2 Q3

Monopoly union facing producersunder perfect competition

Monopoly union facing producersunder perfect competition

Unemployment

• Bilateral monopoly– no unique equilibrium

– relationship between wages and employment

• Bilateral monopoly– no unique equilibrium




O Q of labour

£

W1

Q1

MRPL

MCL1

No

un

ion

S1 (=ACL1)

No unio

n

Bilateral monopolyBilateral monopoly

Monopsony:no union

W2

xMCL2

= ACL2

O Q of labour

£

W1

Q1

MRPL

MCL1

No

un

ion

S1 (=ACL1)

No unio

n


Bilateralmonopoly

Q3

W2

xMCL2

= ACL2

O Q of labour

£

W1

Q1

MRPL

MCL1


Wage can riseto W2 with no fallin employment

W2

x

MCL3 = ACL3

O Q of labour

£

W1

Q1

MRPL

MCL1


Wage can risefrom W1 to W3

and employmentrises to Q2

W3

Q2

• Bilateral monopoly

– no unique equilibrium


– collective bargaining











• union threats and promises













• employers’ threats and promises















• role of the government







• role of the government



• The efficiency wage hypothesis

– higher wage rates may lead to higher productivity

• less “shirking”

• reduced labour turnover

• self-selection

• morale

• The efficiency wage hypothesis

– higher wage rates may lead to higher productivity

• less “shirking”

• reduced labour turnover

• self-selection

• morale



• Flexible labour markets

– the flexible firm

– functional flexibility

– numerical flexibility

– core workers

– peripheral workers





– core workers




Core groupCore groupPrimary labour Primary labour

marketmarketFunctionalFunctionalflexibilityflexibility



The flexible firm

First peripheral groupFirst peripheral groupSecondary labour marketSecondary labour market

Numerical flexibilityNumerical flexibility







The flexible firm





Self-employmentSelf-employment





The flexible firm






Ag

ency

Ag

ency

tem

por

ari

este

mp

ora

ries

The flexible firm






Ag

ency

Ag

ency

tem

por

ari

este

mp

ora

ries

Su

b-S

ub-

contra

cting

contra

cting

The flexible firm




IncreasedIncreasedoutsourcingoutsourcing



Ag

ency

Ag

ency

tem

por

ari

este

mp

ora

ries

Su

b-S

ub-

contra

cting

contra

cting

The flexible firm



Second

Second

peripheralperipheral

grou

pgr

oup





Ag

ency

Ag

ency

tem

por

ari

este

mp

ora

ries

Su

b-S

ub-

contra

cting

contra

cting

The flexible firm



Short-

Short-

term

term

contracts

contracts

Second

Second


grou

pgr

oup





Ag

ency

Ag

ency

tem

por

ari

este

mp

ora

ries

Su

b-S

ub-

contra

cting

contra

cting

The flexible firm



Short-

Short-

term

term

contracts

contracts

PublicPublicSubsidy

SubsidyTrainees

TraineesSecond

Second


grou

pgr

oup





Ag

ency

Ag

ency

tem

por

ari

este

mp

ora

ries

Su

b-S

ub-

contra

cting

contra

cting

The flexible firm



Short-

Short-

term

term

contracts

contracts

PublicPublicSubsidy

SubsidyTrainees

TraineesDelayedDelayed

recruitmentrecruitmentSecond

Second


grou

pgr

oup





Ag

ency

Ag

ency

tem

por

ari

este

mp

ora

ries

Su

b-S

ub-

contra

cting

contra

cting

The flexible firm



Short-

Short-

term

term

contracts

contracts

PublicPublicSubsidy

SubsidyTrainees


recruitmentrecruitment

JobJob

sharing

sharing

Second

Second


grou

pgr

oup





Ag

ency

Ag

ency

tem

por

ari

este

mp

ora

ries

Su

b-S

ub-

contra

cting

contra

cting

The flexible firm



Short-

Short-

term

term

contracts

contracts

PublicPublicSubsidy

SubsidyTrainees


recruitmentrecruitment

JobJob

sharing

sharing

Part

Part

time

time

Second

Second


grou

pgr

oup





Ag

ency

Ag

ency

tem

por

ari

este

mp

ora

ries

Su

b-S

ub-

contra

cting

contra

cting

The flexible firm





– core workers


– Implications for the distribution of income





– core workers


– Implications for the distribution of income



Causes of InequalityCauses of Inequality

• Inequality in the UK– income distribution before and after taxes

and benefits

• Inequality in the UK– income distribution before and after taxes

and benefits

Size distribution of UK income byquintile group of households: 1998/9


Bottom20%

Next 20%

Middle20%

Next 20%

Top20%

15%15%

25%25%

52%52%

7%7%

3%3%

Income beforetaxes and benefits



Bottom20%

Next 20%

Middle20%

Next 20%

Top20%

15%

25%

52%

7%

3%3%

Bottom20%

Next 20%

Middle20%

Next 20%

Top20%

11%

16%

22%

45%

7%

Income beforetaxes and benefits

Income aftertaxes and benefits


• Inequality in the UK

– income distribution before and after taxes and benefits

– distribution of income by source




Sources of UK household income as apercentage of gross household incomeSources of UK household income as apercentage of gross household income

1970 1998/9

67%

8%

4%7%7% 13%

1%1%1%1%1%1%1%1%

77%

7%

4%

3%3%9%

Wages and salaries Income from self employment Investment incomeInvestment income

Pensions, annuities Social security benefits Other

Source: Family Spending (ONS, 2000)





– distribution of wages and salaries by occupation





0 100 200 300 400 500 600 700 800 900 1000

Bar staff

Sales assistants

Clerks

Assemblers

Nurses

Secondary teachers

Personnel managers

Medical practioners

Financial managers

Average gross weekly earnings ofUK full-time adult employees: 1999






– distribution of wages and salaries by sex





– distribution of wages and salaries by sex

0 100 200 300 400 500 600 700 800 900 1000 1100

Bar staff

Sales assistants

Clerks

Assemblers

Nurses

Secondary teachers

Personnel managers

Medical practioners

Financial managers

Women's earnings

Men's earnings

Average gross weekly earnings ofUK full-time adult employees: 1999

Average gross hourly earnings for full-time adultUK employees (pence per hour): 1970-99

Average gross hourly earnings for full-time UK employees on adult rates (1999)


• The causes of inequality– differences in ability– differences in attitude– differences in qualifications– differences in hours worked– differences in pleasantness of job– differences in power– differences in the demand for goods– discrimination– differences in household composition

• The causes of inequality– differences in ability– differences in attitude– differences in qualifications– differences in hours worked– differences in pleasantness of job– differences in power– differences in the demand for goods– discrimination– differences in household composition

£0

£100

£200

£300

£400

£500

£600

£700

Gross income

Disposable income

Weekly income for different types ofUK household: 1998/9

Source: Family spending (ONS,2000)

One adult(not retired)

One adult, two ormore children

One man, one woman(not retired)

Two adults, fouror more children


• The causes of inequality (cont.)

– inequality of wealth

– degree of government support

– unemployment

• The causes of inequality (cont.)

– inequality of wealth

– degree of government support

– unemployment

The Redistribution of IncomeThe Redistribution of Income

• Taxation

– tax and income

• proportional

• progressive

• regressive

– problems in using taxes to redistribute incomes

• income taxes

• taxes on goods and services

• Taxation

– tax and income

• proportional

• progressive

• regressive

– problems in using taxes to redistribute incomes

• income taxes

• taxes on goods and services


• Taxation (cont.)

– taxation and incentives

• income and substitution effects

• raising the higher rates of tax

• raising the basic rate

• reducing tax allowances

• Taxation (cont.)

– taxation and incentives

• income and substitution effects

• raising the higher rates of tax

• raising the basic rate

• reducing tax allowances


• Benefits

– cash benefits

• means-tested benefits

• universal benefits

– benefits in kind

– benefits and the redistribution of income

• Benefits

– cash benefits





0

1000

2000

3000

4000

5000

6000

7000

8000Be

lgium

Denm

ark

Fran

ce

German

y

Greec

e

Ireland Italy

Netherland

s

Portu

gal

Spain

Swed

en UK

EU15

1997

Social protection benefits in variousEuropean countries: (a) Euro per head

Source: Eurostat, 2000

Eu

ro p

er h

ead

0

5

10

15

20

25

30

35

40

1990

1997

Social protection benefits in variousEuropean countries: (b) % of GDP

Source: Eurostat, 2000

% o

f G

DP


• Benefits

– cash benefits





– the problem of the poverty trap

• Benefits

– cash benefits





– the problem of the poverty trap

5. wages and the distribution of income. labour market trends shift from agricultural and...

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