Wage differentials Flashcards
What do we say about wage differentials in a perfectly competitive labour market and why do we say this?
We say that there is no wage differentials, where theres differences in wages between certain professions.
We say this because we assume that in a perfectly competitive labour market, workers are homogenous and there’s perfect mobility of labour.
Characteristics of a competitive labour market?
There are many potential workers and employers
Labour is homogenous. So all workers have the skills and qualifications needed.
Perfect Info. Workers know the wage rate, firms know the skills and productivity.
Firms are wage takers. Where D=S
There are no barriers to exit/entry for workers.
What can we say about the labour market if theres wage differentials?
We can say there are labour market imperfections.
Explain the labour market imperfection of labour is not homogenous.
All workers are different meaning they have different marginal revenue products of labour.
Supply of labour is different in different professions and certain people a suitable for the profession.
Industries where labour is scarce will have higher wages.
Discrimination takes place in the real world.
Explain the labour market imperfection of non-monetary consideration.
Perfectly comp labour markets assume people will based their decisions to work on the wages.
However there are other non-monetary considerations. EG: pension plans, benefits, holidays.
It means if non-monetary factors are good, supply of labour increases and this reduces wages.
Also, industries where conditions are terrible will see a lack of supply so high wages known as compensating wage differential.
Explain the labour market imperfection of labour market is not perfectly mobile.
Labour may be occupationally immobile where not all workers have the same skills and productivity.
Qualifications are also needed in certain sectors. Without it they cant get the job. Wages here will be high as a result.
Also regional wage differences may be due to geographical immobility. People dont want to move for work so supply of labour in this industry will be restricted, pushing up the wages.
Explain the labour market imperfection of trade unions existing.
TU can bargain for higher wages. If they are strong then they have more bargaining power. This will push up wages.
Explain the labour market imperfection of monopsonies.
Monopsonies are when theres one buyer of labour in the market so they can set wages.
This drives down wages meaning wages here will be lower than in other industries.
Why do men earn higher than women?
Women tend to be in and out of the labour force much more than men
Age of economically inactive
Women end up in low paid occupations
Increase in supply of female workers
Discrimination
Why do certain ethnic groups earn less than others?
Minority groups are less qualified on average
Lack of language proficiency
Minority ethnic groups often concentrated in low paid sectors
They tend to live in poorer parts of the country
Reluctance of minority groups to move and earn more
Discrimination
Why do people in the North earn less than those in the South?
Reconstructing of the UK economy and different demands of labour
Negative multiplier/accelerator effect
Occupational and geographical immobility in the north
Migration of labour to more prosperous areas is only of the most productive workers
What are the advantages of wage differentials?
Incentives to work.
Higher paid jobs will incentivse people to gain more qualifications and skills to boost their MRP. Also beneficial for society as theres more productivity and so LR growth, which is sustainable growth.
Trickle down effect.
People who earn more will spend creating a multiplier effect. AD will increase. In the industry where AD rises theres higher wages and often job creation.
Progressive tax system will also mean more tax revenue from the reach, which can be spent in things like benefits, redistributing income.
Encourage enterprise.
Entrepreneurs know that by boosting MRP or by taking risks, they can earn more. This is good for the economy as it may mean more development in areas like technology. This can create jobs.
Also they boost comp, driving down prices for consumers.
Promotes efficient resource allocation.
Changes in wages in an industry may encourage those with the correct skills to seek the best job. This will be the best allocation of labour, which will also benefit the economy.
What are the cons of wage differentials?
Income inequality.
Bad for those on lower incomes as they cant earn as much, reducing living standards. Also effects gov who must now provide benefits to them. This is difficult in times where theres a strict budget. Large income inequality will mean lower growth in the LR since the poor have the largest propensity to consume.
Social costs of income inequality.
There may be higher crimes rates, depression, divorce, etc. This will lead to negative externalities. Gov will have to spend more on policing and other services to help with this.
Trickle down effect may not occur.
Higher income earners have larger propensity to save. Businesses may send their money abroad to invest their due to lower costs. These people may also tax evade, preventing re-distribution policies.
Gov solutions limited if they are the monopsonist employer.
This means the gov itself is the problem. This can be a heavy cost for the government. Also they dont want to increase wages quickly as they will lose control of inflation.
Evaluation of wage differentials.
How much inequality is there.
If income inequality is small, then benefits of wage differentials may outweigh the costs.
Risks of government failure.
Wage differentials may lead to gov intervention, risking gov failure. Gov may be better of using other methods like higher taxes, min wages, etc, but this may be risky and it could destroy incentives.
SR vs LR.
The LR benefits may outweigh the SR problems. For example, greater entrepreneurship and trickle down effect. This tends to result in lower prices, new innovative products, and even higher wages for the poor.
