Wages And The Distribution Of Income
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Wages and the Distribution of Income
Labour Market Trends ■
Sectoral shift ✜
from agricultural and manufacturing to service-sector employment
Employment in different sectors of the UK economy 20
Agriculture Mining, energy and construction
15
Manufacturing
Millions
Services
10
5
0 1890 1900 1910 1920 1930 1939 1950 1960 1970 1980 1990 2003
Employment in different sectors of the UK economy 20
Agriculture Mining, energy and construction
15
Manufacturing
Millions
Services
10
5
0 1890 1900 1910 1920 1930 1939 1950 1960 1970 1980 1990 2003
Employment in different sectors of the UK economy 20
Agriculture Mining, energy and construction
15
Manufacturing
Millions
Services
10
5
0 1890 1900 1910 1920 1930 1939 1950 1960 1970 1980 1990 2003
Employment in different sectors of the UK economy 20
Agriculture Mining, energy and construction
15
Manufacturing
Millions
Services
10
5
0 1890 1900 1910 1920 1930 1939 1950 1960 1970 1980 1990 2003
Employment in different sectors of the UK economy 20
Agriculture Mining, energy and construction
15
Manufacturing
Millions
Services
10
5
0 1890 1900 1910 1920 1930 1939 1950 1960 1970 1980 1990 2003
Labour Market Trends ■
Sectoral shift ✜
■
from agricultural and manufacturing to service-sector employment
Rise in part-time employment
The growth of part-time employment in the UK 30,000
Total employment
28,000 26,000 24,000 22,000 20,000 18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
The growth of part-time employment in the UK 30,000
Total employment
28,000 26,000 24,000 22,000 20,000 18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
The growth of part-time employment in the UK 30,000
Total employment
28,000 26,000 24,000
Full-time employment
22,000 20,000 18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
The growth of part-time employment in the UK 30,000
Total employment
28,000 26,000 24,000
Full-time employment
22,000 20,000 18,000 16,000 14,000 12,000 10,000
Part-time employment
8,000 6,000 4,000 2,000 0
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
Labour Market Trends ■
Sectoral shift ✜
from agricultural and manufacturing to service-sector employment
■
Rise in part-time employment
■
Rise in female participation rates
Labour Market Trends ■
Sectoral shift ✜
from agricultural and manufacturing to service-sector employment
■
Rise in part-time employment
■
Rise in female participation rates
■
Rise in temporary employment
Labour Market Trends ■
Sectoral shift ✜
from agricultural and manufacturing to service-sector employment
■
Rise in part-time employment
■
Rise in female participation rates
■
Rise in temporary employment
■
Downsizing
Wage Determination in a Perfect Market ■
■
Perfect labour markets ✜
everyone is a wage taker
✜
freedom of entry
✜
perfect knowledge
✜
homogeneous labour
Market equilibrium
A labour market: whole market Sall workers
Hourly wage
in the market
Wm
Dall firms in the market
O Labour hours
Hourly wage
A labour market: individual employer
Slabour
Wm
Dindividual employer O
Q1 Labour hours
A labour market: individual worker
Hourly wage
Sindividual worker
Dlabour
Wm
O
Q2 Labour hours
Wage Determination in a Perfect Market ■
The supply of labour curve ✜
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
Wage Determination in a Perfect Market ■
The demand for labour: marginal productivity theory ✜
the profit-maximising approach
✜
the marginal cost of labour (MCL)
✜
the marginal revenue product of labour (MRPL)
Marginal physical product of labour curve x
Output
Diminishing returns set in here
MPPL O
Q of labour
Wage Determination in a Perfect Market ■
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 profit-maximising level of employment for a firm
The profit-maximising level of employment £
MCL= W
Wm
MRPL = MPPL × Pgood
MRPL O
Q of labour
Qe
Wage Determination in a Perfect Market ■
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 profit-maximising level of employment for a firm
✜
derivation of the firm’s demand curve for labour
Deriving the firm’s demand curve for labour £ a
W1
MCL1
b
W2
c
W3
MCL2 MCL3
Profits maximised where MRPL = MCL MRPL O
Q1 Q of labour
Q2 Q3
Deriving the firm’s demand curve for labour £ a
W1
MCL1
b
W2
c
W3
The MRPL curve traces out the demand curve
O
MCL2 MCL3
D Q1
Q of labour
Q2 Q3
Wage Determination in a Perfect Market ■
Wages and profits under perfect competition
Wages and profits £
Surplus for firm MCL = W
W
Wages MRPL O
Q of labour
Qe
Wage Determination in Imperfect Markets ■ ■
Power in labour markets Firms with monopsony power in employing labour ✜
MCL > W
Monopsony £
MCL
ACL ≡ W (supply curve)
MRPL O Q of labour
Wage Determination in Imperfect Markets ■ ■
Power in labour markets Firms with monopsony power in employing labour ✜
MCL > W
✜
effects on wages and employment
Monopsony £
MCL
ACL ≡ W (supply curve)
W2 W1
MRPL O
Q1 Q of labour
Q2
Wage Determination in Imperfect Markets ■ ■
■
Power in labour markets Firms with monopsony power in employing labour ✜
MCL > W
✜
effects on wages and employment
Unions with monopoly power
Wage Determination in Imperfect Markets ■ ■
■
Power in labour markets Firms with monopsony power in employing labour ✜
MCL > W
✜
effects on wages and employment
Unions with monopoly power ✜
unions facing competitive employers
Wage Determination in Imperfect Markets ■ ■
■
Power in labour markets Firms with monopsony power in employing labour ✜
MCL > W
✜
effects on wages and employment
Unions with monopoly power unions facing competitive employers ✜ effects of wage increases on employment ✜
£
Monopoly union facing producers under perfect competition S
W1
D O
Q1
Q of labour
£ W2
Monopoly union facing producers under perfect competition S Unemployment
W1
D O
Q2
Q1
Q3
Q of labour
Wage Determination in Imperfect Markets ■
Bilateral monopoly no unique equilibrium ✜ relationship between wages and employment ✜
Bilateral monopoly £
S1 (=ACL1)
MCL1
Monopsony: no union
W1
No un
ion
n
N
o
o ni
u
MRPL O
Q1
Q of labour
Bilateral monopoly £
MCL1
x
W2
S1 (=ACL1) MCL2 = ACL2 Bilateral monopoly
W1
No un
ion
n
N
o
o ni
u
MRPL O
Q1
Q3
Q of labour
Bilateral monopoly £
MCL1
W2
x
MCL2 = ACL2 Wage can rise to W2 with no fall in employment
W1
MRPL O
Q1
Q of labour
Bilateral monopoly £
MCL1
x
W2
MCL3 = ACL3
W3
Wage can rise from W1 to W3 and employment rises to Q2
W1
MRPL O
Q1
Q2
Q of labour
Wage Determination in Imperfect Markets ■
Bilateral monopoly ✜
no unique equilibrium
✜
relationship between wages and employment
✜
collective bargaining
Wage Determination in Imperfect Markets ■
Bilateral monopoly ✜
no unique equilibrium
✜
relationship between wages and employment
✜
collective bargaining ✦ union
threats and promises
Wage Determination in Imperfect Markets ■
Bilateral monopoly ✜
no unique equilibrium
✜
relationship between wages and employment
✜
collective bargaining ✦ union
threats and promises
✦ employers’
threats and promises
Wage Determination in Imperfect Markets ■
Bilateral monopoly ✜
no unique equilibrium
✜
relationship between wages and employment
✜
collective bargaining ✦ union
threats and promises
✦ employers’ ✦ role
threats and promises
of the government
Wage Determination in Imperfect Markets ■
The efficiency wage hypothesis ✜
higher wage rates may lead to higher productivity ✦ less
“shirking”
✦ reduced
labour turnover
✦ self-selection ✦ morale
Wage Determination in Imperfect Markets ■
Flexible labour markets ✜
✜
the flexible firm ✦ functional
flexibility
✦ numerical
flexibility
types of workers ✦ core
workers
✦ peripheral
workers
The flexible firm
The flexible firm
Core group Primary labour market Functional flexibility
The flexible firm First peripheral group Secondary labour market Numerical flexibility Core group Primary labour market Functional flexibility
Self-employment First peripheral group Secondary labour market Numerical flexibility Core group Primary labour market Functional flexibility
The flexible firm
Self-employment
Agency temporaries
First peripheral group Secondary labour market Numerical flexibility Core group Primary labour market Functional flexibility
The flexible firm
Self-employment
The flexible firm
Core group Primary labour market Functional flexibility
Subcontracting
Agency temporaries
First peripheral group Secondary labour market Numerical flexibility
Self-employment
The flexible firm
Core group Primary labour market Functional flexibility
Increased outsourcing
Subcontracting
Agency temporaries
First peripheral group Secondary labour market Numerical flexibility
Self-employment
The flexible firm
p
ou
gr
nd
peripheral
Increased outsourcing
Subcontracting
Core group Primary labour market Functional flexibility
co Se
Agency temporaries
First peripheral group Secondary labour market Numerical flexibility
Self-employment
The flexible firm
p
ou
gr
peripheral
Increased outsourcing
Subcontracting
Core group Primary labour market Functional flexibility
nd co Se ort Sh m ter acts ntr co
Agency temporaries
First peripheral group Secondary labour market Numerical flexibility
Self-employment
The flexible firm
p
ou
gr
peripheral Pu Su blic Tra bsid ine y es
Increased outsourcing
Subcontracting
Core group Primary labour market Functional flexibility
nd co Se ort Sh m ter acts ntr co
Agency temporaries
First peripheral group Secondary labour market Numerical flexibility
Self-employment
The flexible firm
p
ou
gr
peripheral Pu Su blic Tra bsid ine y Delayed es recruitment
Increased outsourcing
Subcontracting
Core group Primary labour market Functional flexibility
nd co Se ort Sh m ter acts ntr co
Agency temporaries
First peripheral group Secondary labour market Numerical flexibility
Self-employment
The flexible firm
p
ou
gr
peripheral Pu Su blic Tra bsid ine y Delayed es recruitment
Increased outsourcing
b Jo ing ar h s
Subcontracting
Core group Primary labour market Functional flexibility
nd co Se ort Sh m ter acts ntr co
Agency temporaries
First peripheral group Secondary labour market Numerical flexibility
The flexible firm
Self-employment
Increased outsourcing
Pa tim rt e
p
ou
gr
peripheral Pu Su blic Tra bsid ine y Delayed es recruitment
Subcontracting
Core group Primary labour market Functional flexibility
nd co Se ort Sh m ter acts ntr co
Agency temporaries
First peripheral group Secondary labour market Numerical flexibility
b Jo ing ar h s
Wage Determination in Imperfect Markets ■
Flexible labour markets ✜
✜
the flexible firm ✦ functional
flexibility
✦ numerical
flexibility
types of workers ✦ core
workers
✦ peripheral
✜
workers
implications for the distribution of income
Causes of Inequality ■
Inequality in the UK ✜
income distribution before and after taxes and benefits
Size distribution of UK income by quintile group of households: 2001/2 Bottom 20% 4%
Next 20%
9%
Middle 20% Top 20%
15%
48%
24%
Next 20%
Income before taxes and benefits
Size distribution of UK income by quintile group of households: 2001/2 Bottom 20% 4%
Next 20%
Bottom 20% Top 20%
6% 11%
9%
Next 20%
Middle 20% Top 20%
15%
48%
45%
16%
Middle 20%
24%
22%
Next 20% Next 20%
Income before taxes and benefits
Income after taxes and benefits
Causes of Inequality ■
Inequality in the UK ✜
income distribution before and after taxes and benefits
✜
distribution of income by source
Sources of UK household income as a percentage of gross household income Wages and salaries
Income from self employment
Investment income
Pensions, annuities
Social security benefits
Other
3% 4%
9%
1%
7%
77%
1970
2001/2 Source: Family Spending (ONS, 2002)
Sources of UK household income as a percentage of gross household income Wages and salaries
Income from self employment
Investment income
Pensions, annuities
Social security benefits
Other
3% 4%
9%
1%
1% 12% 7%
7%
4% 9% 77%
1970
67%
2001/2 Source: Family Spending (ONS, 2002)
Causes of Inequality ■
Inequality in the UK ✜
income distribution before and after taxes and benefits
✜
distribution of income by source
✜
distribution of wages and salaries by occupation
Average gross weekly earnings of UK full-time adult male employees: 2002 Company financial managers Medical practitioners Investment analysts Personnel managers Accountants Secondary school teachers Natural Scientists Police officers, sergeant and below Nurses Welders Records clerks Painters and decorators Bus and coach drivers General farm workers Sales assistants Bar staff Kitchen porters, hands
£0
£200
£400
£600
£800
£1,000
£1,200
£1,400
Causes of Inequality ■
Inequality in the UK ✜
income distribution before and after taxes and benefits
✜
distribution of income by source
✜
distribution of wages and salaries by occupation
✜
distribution of wages and salaries by sex
Average gross weekly earnings of UK full-time adult female employees: 2002 Medical practitioners Financial managers Personnel managers Police- sergeant &below Secondary teachers Nurses Social workers Secretaries Clerks Sales assistants Bar staff Waitresses £0
£200
£400
£600
£800
£1,000
Average gross weekly earnings of UK full-time adult employees: 2002 Financial managers Medical practioners Personnel managers Secondary teachers Nurses Women's earnings
Factory lineworkers
Men's earnings
Clerks Sales assistants Bar staff 0
200
400
600
800
1000
1200
1400
Average gross hourly earnings for full-time adult UK employees (pence per hour): 1970-2002
Average gross hourly earnings for full-time adult UK employees (pence per hour): 1970-2002
Average gross hourly earnings for full-time adult UK employees (pence per hour): 1970-2002
Average gross hourly earnings for full-time UK employees on adult rates (2002)
Average gross hourly earnings for full-time UK employees on adult rates (2002)
Average gross hourly earnings for full-time UK employees on adult rates (2002)
Causes of Inequality ■
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
Percentage shares of income before and after tax by decile group of households: 2001/2 £900 £800
Gross income
£700
Disposable income
£600 £500 £400 £300 £200 £100 £0
One adult One adult, One man, One man, One man, Two adults, (not retired)two or moreone woman,one womanone woman, four or more children on state (not retired)two children children Source: Family spending (ONS,2003)
Percentage shares of income before and after tax by decile group of households: 2001/2 £900 £800
Gross income
£700
Disposable income
£600 £500 £400 £300 £200 £100 £0
One adult One adult, One man, One man, One man, Two adults, (not retired)two or moreone woman,one womanone woman, four or more children on state (not retired)two children children Source: Family spending (ONS,2003)
Causes of Inequality ■
The causes of inequality (cont.) ✜
inequality of wealth
✜
degree of government support
✜
unemployment
The Redistribution of Income ■
Taxation ✜
tax and income ✦ proportional ✦ progressive ✦ regressive
✜
problems in using taxes to redistribute incomes ✦ income ✦ taxes
taxes
on goods and services
The Redistribution of Income ■
Taxation (cont.) ✜
taxation and incentives: effect of raising income taxes ✦ income
effects
• reduces disposable income: people work more ✦ substitution
effects
• reduces opportunity cost of leisure: people work less
The Redistribution of Income ■
Benefits ✜
cash benefits ✦ means-tested ✦ universal
benefits
benefits
✜
benefits in kind
✜
benefits and the redistribution of income
Social protection benefits in various European countries: (a) Expenditure per head: EU-15 = 100 140
2000
100 80 60 40 20
EU15
UK
Sweden
Spain
Portugal
Netherlands
Italy
Ireland
Greece
Germany
France
Denmark
0 Belgium
% of EU average
120
Source: Eurostat, 2003
Social protection benefits in various European countries: (b) % of GDP
35
1990 30
2000
20 15 10 5
EU15
UK
Sweden
Spain
Portugal
Netherlands
Italy
Ireland
Greece
Germany
France
Denmark
0 Belgium
% of GDP
25
Source: Eurostat, 2003
The Redistribution of Income ■
Benefits ✜
cash benefits ✦ means-tested ✦ universal
benefits
benefits
✜
benefits in kind
✜
benefits and the redistribution of income
✜
the problem of the poverty trap
✜
tax credits in the UK
UK tax credits, 2003/4
Labour Market Trends ■
Sectoral shift ✜
from agricultural and manufacturing to service-sector employment
Employment in different sectors of the UK economy 20
Agriculture Mining, energy and construction
15
Manufacturing
Millions
Services
10
5
0 1890 1900 1910 1920 1930 1939 1950 1960 1970 1980 1990 2003
Employment in different sectors of the UK economy 20
Agriculture Mining, energy and construction
15
Manufacturing
Millions
Services
10
5
0 1890 1900 1910 1920 1930 1939 1950 1960 1970 1980 1990 2003
Employment in different sectors of the UK economy 20
Agriculture Mining, energy and construction
15
Manufacturing
Millions
Services
10
5
0 1890 1900 1910 1920 1930 1939 1950 1960 1970 1980 1990 2003
Employment in different sectors of the UK economy 20
Agriculture Mining, energy and construction
15
Manufacturing
Millions
Services
10
5
0 1890 1900 1910 1920 1930 1939 1950 1960 1970 1980 1990 2003
Employment in different sectors of the UK economy 20
Agriculture Mining, energy and construction
15
Manufacturing
Millions
Services
10
5
0 1890 1900 1910 1920 1930 1939 1950 1960 1970 1980 1990 2003
Labour Market Trends ■
Sectoral shift ✜
■
from agricultural and manufacturing to service-sector employment
Rise in part-time employment
The growth of part-time employment in the UK 30,000
Total employment
28,000 26,000 24,000 22,000 20,000 18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
The growth of part-time employment in the UK 30,000
Total employment
28,000 26,000 24,000 22,000 20,000 18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
The growth of part-time employment in the UK 30,000
Total employment
28,000 26,000 24,000
Full-time employment
22,000 20,000 18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
The growth of part-time employment in the UK 30,000
Total employment
28,000 26,000 24,000
Full-time employment
22,000 20,000 18,000 16,000 14,000 12,000 10,000
Part-time employment
8,000 6,000 4,000 2,000 0
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
Labour Market Trends ■
Sectoral shift ✜
from agricultural and manufacturing to service-sector employment
■
Rise in part-time employment
■
Rise in female participation rates
Labour Market Trends ■
Sectoral shift ✜
from agricultural and manufacturing to service-sector employment
■
Rise in part-time employment
■
Rise in female participation rates
■
Rise in temporary employment
Labour Market Trends ■
Sectoral shift ✜
from agricultural and manufacturing to service-sector employment
■
Rise in part-time employment
■
Rise in female participation rates
■
Rise in temporary employment
■
Downsizing
Wage Determination in a Perfect Market ■
■
Perfect labour markets ✜
everyone is a wage taker
✜
freedom of entry
✜
perfect knowledge
✜
homogeneous labour
Market equilibrium
A labour market: whole market Sall workers
Hourly wage
in the market
Wm
Dall firms in the market
O Labour hours
Hourly wage
A labour market: individual employer
Slabour
Wm
Dindividual employer O
Q1 Labour hours
A labour market: individual worker
Hourly wage
Sindividual worker
Dlabour
Wm
O
Q2 Labour hours
Wage Determination in a Perfect Market ■
The supply of labour curve ✜
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
Wage Determination in a Perfect Market ■
The demand for labour: marginal productivity theory ✜
the profit-maximising approach
✜
the marginal cost of labour (MCL)
✜
the marginal revenue product of labour (MRPL)
Marginal physical product of labour curve x
Output
Diminishing returns set in here
MPPL O
Q of labour
Wage Determination in a Perfect Market ■
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 profit-maximising level of employment for a firm
The profit-maximising level of employment £
MCL= W
Wm
MRPL = MPPL × Pgood
MRPL O
Q of labour
Qe
Wage Determination in a Perfect Market ■
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 profit-maximising level of employment for a firm
✜
derivation of the firm’s demand curve for labour
Deriving the firm’s demand curve for labour £ a
W1
MCL1
b
W2
c
W3
MCL2 MCL3
Profits maximised where MRPL = MCL MRPL O
Q1 Q of labour
Q2 Q3
Deriving the firm’s demand curve for labour £ a
W1
MCL1
b
W2
c
W3
The MRPL curve traces out the demand curve
O
MCL2 MCL3
D Q1
Q of labour
Q2 Q3
Wage Determination in a Perfect Market ■
Wages and profits under perfect competition
Wages and profits £
Surplus for firm MCL = W
W
Wages MRPL O
Q of labour
Qe
Wage Determination in Imperfect Markets ■ ■
Power in labour markets Firms with monopsony power in employing labour ✜
MCL > W
Monopsony £
MCL
ACL ≡ W (supply curve)
MRPL O Q of labour
Wage Determination in Imperfect Markets ■ ■
Power in labour markets Firms with monopsony power in employing labour ✜
MCL > W
✜
effects on wages and employment
Monopsony £
MCL
ACL ≡ W (supply curve)
W2 W1
MRPL O
Q1 Q of labour
Q2
Wage Determination in Imperfect Markets ■ ■
■
Power in labour markets Firms with monopsony power in employing labour ✜
MCL > W
✜
effects on wages and employment
Unions with monopoly power
Wage Determination in Imperfect Markets ■ ■
■
Power in labour markets Firms with monopsony power in employing labour ✜
MCL > W
✜
effects on wages and employment
Unions with monopoly power ✜
unions facing competitive employers
Wage Determination in Imperfect Markets ■ ■
■
Power in labour markets Firms with monopsony power in employing labour ✜
MCL > W
✜
effects on wages and employment
Unions with monopoly power unions facing competitive employers ✜ effects of wage increases on employment ✜
£
Monopoly union facing producers under perfect competition S
W1
D O
Q1
Q of labour
£ W2
Monopoly union facing producers under perfect competition S Unemployment
W1
D O
Q2
Q1
Q3
Q of labour
Wage Determination in Imperfect Markets ■
Bilateral monopoly no unique equilibrium ✜ relationship between wages and employment ✜
Bilateral monopoly £
S1 (=ACL1)
MCL1
Monopsony: no union
W1
No un
ion
n
N
o
o ni
u
MRPL O
Q1
Q of labour
Bilateral monopoly £
MCL1
x
W2
S1 (=ACL1) MCL2 = ACL2 Bilateral monopoly
W1
No un
ion
n
N
o
o ni
u
MRPL O
Q1
Q3
Q of labour
Bilateral monopoly £
MCL1
W2
x
MCL2 = ACL2 Wage can rise to W2 with no fall in employment
W1
MRPL O
Q1
Q of labour
Bilateral monopoly £
MCL1
x
W2
MCL3 = ACL3
W3
Wage can rise from W1 to W3 and employment rises to Q2
W1
MRPL O
Q1
Q2
Q of labour
Wage Determination in Imperfect Markets ■
Bilateral monopoly ✜
no unique equilibrium
✜
relationship between wages and employment
✜
collective bargaining
Wage Determination in Imperfect Markets ■
Bilateral monopoly ✜
no unique equilibrium
✜
relationship between wages and employment
✜
collective bargaining ✦ union
threats and promises
Wage Determination in Imperfect Markets ■
Bilateral monopoly ✜
no unique equilibrium
✜
relationship between wages and employment
✜
collective bargaining ✦ union
threats and promises
✦ employers’
threats and promises
Wage Determination in Imperfect Markets ■
Bilateral monopoly ✜
no unique equilibrium
✜
relationship between wages and employment
✜
collective bargaining ✦ union
threats and promises
✦ employers’ ✦ role
threats and promises
of the government
Wage Determination in Imperfect Markets ■
The efficiency wage hypothesis ✜
higher wage rates may lead to higher productivity ✦ less
“shirking”
✦ reduced
labour turnover
✦ self-selection ✦ morale
Wage Determination in Imperfect Markets ■
Flexible labour markets ✜
✜
the flexible firm ✦ functional
flexibility
✦ numerical
flexibility
types of workers ✦ core
workers
✦ peripheral
workers
The flexible firm
The flexible firm
Core group Primary labour market Functional flexibility
The flexible firm First peripheral group Secondary labour market Numerical flexibility Core group Primary labour market Functional flexibility
Self-employment First peripheral group Secondary labour market Numerical flexibility Core group Primary labour market Functional flexibility
The flexible firm
Self-employment
Agency temporaries
First peripheral group Secondary labour market Numerical flexibility Core group Primary labour market Functional flexibility
The flexible firm
Self-employment
The flexible firm
Core group Primary labour market Functional flexibility
Subcontracting
Agency temporaries
First peripheral group Secondary labour market Numerical flexibility
Self-employment
The flexible firm
Core group Primary labour market Functional flexibility
Increased outsourcing
Subcontracting
Agency temporaries
First peripheral group Secondary labour market Numerical flexibility
Self-employment
The flexible firm
p
ou
gr
nd
peripheral
Increased outsourcing
Subcontracting
Core group Primary labour market Functional flexibility
co Se
Agency temporaries
First peripheral group Secondary labour market Numerical flexibility
Self-employment
The flexible firm
p
ou
gr
peripheral
Increased outsourcing
Subcontracting
Core group Primary labour market Functional flexibility
nd co Se ort Sh m ter acts ntr co
Agency temporaries
First peripheral group Secondary labour market Numerical flexibility
Self-employment
The flexible firm
p
ou
gr
peripheral Pu Su blic Tra bsid ine y es
Increased outsourcing
Subcontracting
Core group Primary labour market Functional flexibility
nd co Se ort Sh m ter acts ntr co
Agency temporaries
First peripheral group Secondary labour market Numerical flexibility
Self-employment
The flexible firm
p
ou
gr
peripheral Pu Su blic Tra bsid ine y Delayed es recruitment
Increased outsourcing
Subcontracting
Core group Primary labour market Functional flexibility
nd co Se ort Sh m ter acts ntr co
Agency temporaries
First peripheral group Secondary labour market Numerical flexibility
Self-employment
The flexible firm
p
ou
gr
peripheral Pu Su blic Tra bsid ine y Delayed es recruitment
Increased outsourcing
b Jo ing ar h s
Subcontracting
Core group Primary labour market Functional flexibility
nd co Se ort Sh m ter acts ntr co
Agency temporaries
First peripheral group Secondary labour market Numerical flexibility
The flexible firm
Self-employment
Increased outsourcing
Pa tim rt e
p
ou
gr
peripheral Pu Su blic Tra bsid ine y Delayed es recruitment
Subcontracting
Core group Primary labour market Functional flexibility
nd co Se ort Sh m ter acts ntr co
Agency temporaries
First peripheral group Secondary labour market Numerical flexibility
b Jo ing ar h s
Wage Determination in Imperfect Markets ■
Flexible labour markets ✜
✜
the flexible firm ✦ functional
flexibility
✦ numerical
flexibility
types of workers ✦ core
workers
✦ peripheral
✜
workers
implications for the distribution of income
Causes of Inequality ■
Inequality in the UK ✜
income distribution before and after taxes and benefits
Size distribution of UK income by quintile group of households: 2001/2 Bottom 20% 4%
Next 20%
9%
Middle 20% Top 20%
15%
48%
24%
Next 20%
Income before taxes and benefits
Size distribution of UK income by quintile group of households: 2001/2 Bottom 20% 4%
Next 20%
Bottom 20% Top 20%
6% 11%
9%
Next 20%
Middle 20% Top 20%
15%
48%
45%
16%
Middle 20%
24%
22%
Next 20% Next 20%
Income before taxes and benefits
Income after taxes and benefits
Causes of Inequality ■
Inequality in the UK ✜
income distribution before and after taxes and benefits
✜
distribution of income by source
Sources of UK household income as a percentage of gross household income Wages and salaries
Income from self employment
Investment income
Pensions, annuities
Social security benefits
Other
3% 4%
9%
1%
7%
77%
1970
2001/2 Source: Family Spending (ONS, 2002)
Sources of UK household income as a percentage of gross household income Wages and salaries
Income from self employment
Investment income
Pensions, annuities
Social security benefits
Other
3% 4%
9%
1%
1% 12% 7%
7%
4% 9% 77%
1970
67%
2001/2 Source: Family Spending (ONS, 2002)
Causes of Inequality ■
Inequality in the UK ✜
income distribution before and after taxes and benefits
✜
distribution of income by source
✜
distribution of wages and salaries by occupation
Average gross weekly earnings of UK full-time adult male employees: 2002 Company financial managers Medical practitioners Investment analysts Personnel managers Accountants Secondary school teachers Natural Scientists Police officers, sergeant and below Nurses Welders Records clerks Painters and decorators Bus and coach drivers General farm workers Sales assistants Bar staff Kitchen porters, hands
£0
£200
£400
£600
£800
£1,000
£1,200
£1,400
Causes of Inequality ■
Inequality in the UK ✜
income distribution before and after taxes and benefits
✜
distribution of income by source
✜
distribution of wages and salaries by occupation
✜
distribution of wages and salaries by sex
Average gross weekly earnings of UK full-time adult female employees: 2002 Medical practitioners Financial managers Personnel managers Police- sergeant &below Secondary teachers Nurses Social workers Secretaries Clerks Sales assistants Bar staff Waitresses £0
£200
£400
£600
£800
£1,000
Average gross weekly earnings of UK full-time adult employees: 2002 Financial managers Medical practioners Personnel managers Secondary teachers Nurses Women's earnings
Factory lineworkers
Men's earnings
Clerks Sales assistants Bar staff 0
200
400
600
800
1000
1200
1400
Average gross hourly earnings for full-time adult UK employees (pence per hour): 1970-2002
Average gross hourly earnings for full-time adult UK employees (pence per hour): 1970-2002
Average gross hourly earnings for full-time adult UK employees (pence per hour): 1970-2002
Average gross hourly earnings for full-time UK employees on adult rates (2002)
Average gross hourly earnings for full-time UK employees on adult rates (2002)
Average gross hourly earnings for full-time UK employees on adult rates (2002)
Causes of Inequality ■
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
Percentage shares of income before and after tax by decile group of households: 2001/2 £900 £800
Gross income
£700
Disposable income
£600 £500 £400 £300 £200 £100 £0
One adult One adult, One man, One man, One man, Two adults, (not retired)two or moreone woman,one womanone woman, four or more children on state (not retired)two children children Source: Family spending (ONS,2003)
Percentage shares of income before and after tax by decile group of households: 2001/2 £900 £800
Gross income
£700
Disposable income
£600 £500 £400 £300 £200 £100 £0
One adult One adult, One man, One man, One man, Two adults, (not retired)two or moreone woman,one womanone woman, four or more children on state (not retired)two children children Source: Family spending (ONS,2003)
Causes of Inequality ■
The causes of inequality (cont.) ✜
inequality of wealth
✜
degree of government support
✜
unemployment
The Redistribution of Income ■
Taxation ✜
tax and income ✦ proportional ✦ progressive ✦ regressive
✜
problems in using taxes to redistribute incomes ✦ income ✦ taxes
taxes
on goods and services
The Redistribution of Income ■
Taxation (cont.) ✜
taxation and incentives: effect of raising income taxes ✦ income
effects
• reduces disposable income: people work more ✦ substitution
effects
• reduces opportunity cost of leisure: people work less
The Redistribution of Income ■
Benefits ✜
cash benefits ✦ means-tested ✦ universal
benefits
benefits
✜
benefits in kind
✜
benefits and the redistribution of income
Social protection benefits in various European countries: (a) Expenditure per head: EU-15 = 100 140
2000
100 80 60 40 20
EU15
UK
Sweden
Spain
Portugal
Netherlands
Italy
Ireland
Greece
Germany
France
Denmark
0 Belgium
% of EU average
120
Source: Eurostat, 2003
Social protection benefits in various European countries: (b) % of GDP
35
1990 30
2000
20 15 10 5
EU15
UK
Sweden
Spain
Portugal
Netherlands
Italy
Ireland
Greece
Germany
France
Denmark
0 Belgium
% of GDP
25
Source: Eurostat, 2003
The Redistribution of Income ■
Benefits ✜
cash benefits ✦ means-tested ✦ universal
benefits
benefits
✜
benefits in kind
✜
benefits and the redistribution of income
✜
the problem of the poverty trap
✜
tax credits in the UK
UK tax credits, 2003/4
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