Wages and the Distribution of Income

Wages and the Distributionof Income

Wages and the Distributionof Income

Labour Market TrendsLabour Market Trends

Sectoral shift

from agricultural and manufacturing to service-sector employment

Sectoral shift


0

5

10

15

20

1890 1900 1910 1920 1930 1939 1950 1960 1970 1980 1990 2003

Mill

ions

Agriculture

Mining, energy and construction

Manufacturing

Services

Employment in different sectors of the UK economyEmployment in different sectors of the UK economy

0

5

10

15

20

1890 1900 1910 1920 1930 1939 1950 1960 1970 1980 1990 2003

Mill

ions

Agriculture


Manufacturing

Services


0

5

10

15

20

1890 1900 1910 1920 1930 1939 1950 1960 1970 1980 1990 2003

Mill

ions

Agriculture


Manufacturing

Services


0

5

10

15

20

1890 1900 1910 1920 1930 1939 1950 1960 1970 1980 1990 2003

Mill

ions

Agriculture


Manufacturing

Services


0

5

10

15

20

1890 1900 1910 1920 1930 1939 1950 1960 1970 1980 1990 2003

Mill

ions

Agriculture


Manufacturing

Services



Sectoral shift


Rise in part-time employment

Sectoral shift



0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000

22,000

24,000

26,000

28,000

30,000

1984 1986 1988 1990 1992 1994 1996 1998 2000 2002

Total employment

The growth of part-time employment in the UKThe growth of part-time employment in the UK

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000

22,000

24,000

26,000

28,000

30,000

1984 1986 1988 1990 1992 1994 1996 1998 2000 2002

Total employment


0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000

22,000

24,000

26,000

28,000

30,000

1984 1986 1988 1990 1992 1994 1996 1998 2000 2002

Total employment

Full-time employment


0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000

22,000

24,000

26,000

28,000

30,000

1984 1986 1988 1990 1992 1994 1996 1998 2000 2002

Total employment

Full-time employment

Part-time employment



Sectoral shift



Rise in female participation rates

Sectoral shift





Sectoral shift




Rise in temporary employment

Sectoral shift






Sectoral shift





Downsizing

Sectoral shift





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 marketA labour market: whole market

Dindividual employer

O

Labour hours

Ho

urly

wa

ge

Q1

Wm

Slabour

A labour market: individual employerA labour market: individual employer

O

Labour hours

Ho

urly

wa

ge

Q2

Wm

Dlabour

Sindividual worker

A labour market: individual workerA labour market: individual worker

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

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


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

the marginal cost of labour (MCL)

the marginal revenue product of labour (MRPL)





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

The demand for labour: marginal productivity theory

the profit-maximising approach





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 labourDeriving 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 labourDeriving 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


employing labour MCL > W

Wage Determination in Imperfect MarketsWage Determination in Imperfect Markets

O

Q of labour

£

MRPL

ACL W (supply curve)

MCL

MonopsonyMonopsony


employing labour MCL > W effects on wages and employment




O

Q of labour

£

MRPL

ACL W (supply curve)

Q1

MCL

MonopsonyMonopsony

W1

Q2

W2



Unions with monopoly power



Unions with monopoly power




Unions with monopoly power unions facing competitive employers



Unions with monopoly power unions facing competitive employers




Unions with monopoly power unions facing competitive employers effects of wage increases on employment



Unions with monopoly power unions facing competitive employers effects of wage increases on employment


O Q of labourQ1

S

D

£

W1

Monopoly union facing producersunder perfect competition


O Q of labourQ1

W1

S

D

£

W2

Q2 Q3



Unemployment

Bilateral monopoly no unique equilibrium relationship between wages and

employment

Bilateral monopoly no unique equilibrium relationship between wages and

employment


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

relationship between wages and employment

collective bargaining

Bilateral monopoly





Bilateral monopoly




union threats and promises

Bilateral monopoly






Bilateral monopoly





employers’ threats and promises

Bilateral monopoly







Bilateral monopoly






role of the government

Bilateral monopoly






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

types of workers

core workers

peripheral workers


the flexible firm



types of workers

core workers

peripheral workers


The flexible firmThe flexible firm

Core groupPrimary labour

marketFunctionalflexibility




First peripheral groupSecondary labour market

Numerical flexibility












Self-employmentSelf-employment















Ag

ency

tem

por

ari

esA

gen

cyte

mp

ora

ries











Ag

ency

tem

por

ari

esA

gen

cyte

mp

ora

ries

Su

b-con

tractin

gS

ub-

contra

cting







IncreasedoutsourcingIncreased

outsourcing





Ag

ency

tem

por

ari

esA

gen

cyte

mp

ora

ries

Su

b-con

tractin

gS

ub-

contra

cting






Second

Second

peripheralperipheral

grou

pgr

oup



outsourcing





Ag

ency

tem

por

ari

esA

gen

cyte

mp

ora

ries

Su

b-con

tractin

gS

ub-

contra

cting






Short-

term

contractsS

hort-

term

contracts

Second

Second


grou

pgr

oup



outsourcing





Ag

ency

tem

por

ari

esA

gen

cyte

mp

ora

ries

Su

b-con

tractin

gS

ub-

contra

cting






Short-

term

contractsS

hort-

term

contracts

PublicSubsidyTrainees


Second

Second


grou

pgr

oup



outsourcing





Ag

ency

tem

por

ari

esA

gen

cyte

mp

ora

ries

Su

b-con

tractin

gS

ub-

contra

cting






Short-

term

contractsS

hort-

term

contracts



Delayedrecruitment

Delayedrecruitment

Second

Second


grou

pgr

oup



outsourcing





Ag

ency

tem

por

ari

esA

gen

cyte

mp

ora

ries

Su

b-con

tractin

gS

ub-

contra

cting






Short-

term

contractsS

hort-

term

contracts



Delayedrecruitment

Delayedrecruitment

Job

sharingJob

sharing

Second

Second


grou

pgr

oup



outsourcing





Ag

ency

tem

por

ari

esA

gen

cyte

mp

ora

ries

Su

b-con

tractin

gS

ub-

contra

cting






Short-

term

contractsS

hort-

term

contracts



Delayedrecruitment

Delayedrecruitment

Job

sharingJob

sharing

Part

timePa

rttim

e

Second

Second


grou

pgr

oup



outsourcing





Ag

ency

tem

por

ari

esA

gen

cyte

mp

ora

ries

Su

b-con

tractin

gS

ub-

contra

cting



the flexible firm



types of workers

core workers

peripheral workers

implications for the distribution of income


the flexible firm



types of workers

core workers

peripheral 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: 2001/2


Bottom20%

Next 20%

Middle20%

Next 20%

Top20%

15%15%

24%24%

48%48%

9%9%

4%4%

Income beforetaxes and benefits



Bottom20%

Next 20%

Middle20%

Next 20%

Top20%

15%15%

24%24%

48%48%

9%9%

4%4%

Bottom20%

Next 20%

Middle20%

Next 20%

Top20%

11%11%

16%16%

22%22%

45%45%

6%6%

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 2001/2

1%

77%

7%

4%3%3%

9%

Wages and salaries Income from self employment Investment income

Pensions, annuities Social security benefits Other

Source: Family Spending (ONS, 2002)

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

1970 2001/2

67%

9%

4%

7%

12%

1%1%

77%

7%

4%3%3%

9%

Wages and salaries Income from self employment Investment income

Pensions, annuities Social security benefits Other

Source: Family Spending (ONS, 2002)





distribution of wages and salaries by occupation





£0 £200 £400 £600 £800 £1,000 £1,200 £1,400

Kitchen porters, hands

Bar staff

Sales assistants

General farm workers

Bus and coach drivers

Painters and decorators

Records clerks

Welders

Nurses

Police officers, sergeant and below

Natural Scientists

Secondary school teachers

Accountants

Personnel managers

Investment analysts

Medical practitioners

Company financial managers

Average gross weekly earnings of UKfull-time adult male employees: 2002

Average gross weekly earnings of UKfull-time adult male employees: 2002






distribution of wages and salaries by sex





distribution of wages and salaries by sex

£0 £200 £400 £600 £800 £1,000

Waitresses

Bar staff

Sales assistants

Clerks

Secretaries

Social workers

Nurses

Secondary teachers

Police - sergeant & below

Personnel managers

Financial managers

Medical practitioners

Average gross weekly earnings ofUK full-time adult female employees: 2002

Average gross weekly earnings ofUK full-time adult female employees: 2002

0 200 400 600 800 1000 1200 1400

Bar staff

Sales assistants

Clerks

Factory lineworkers

Nurses

Secondary teachers

Personnel managers

Medical practioners

Financial managers

Women's earnings

Men's earnings

Average gross weekly earnings ofUK full-time adult employees: 2002Average gross weekly earnings ofUK full-time adult employees: 2002

Average gross hourly earnings for full-time adultUK employees (pence per hour): 1970-2002






Average gross hourly earnings for full-time UK employees on adult rates (2002)







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

£800

£900

Gross income

Disposable income

Percentage shares of income before and after taxby decile group of households: 2001/2


Source: Family spending (ONS,2003)

One adult(not retired)

One adult,two or more

children

One man,one woman(not retired)

Two adults,four or more

children

One man,one woman,two children

One man,one woman, on state pensions

£0

£100

£200

£300

£400

£500

£600

£700

£800

£900

Gross income

Disposable income



Source: Family spending (ONS,2003)

One adult(not retired)

One adult,two or more

children

One man,one woman(not retired)

Two adults,four or more

children

One man,one woman,two children

One man,one woman, on state pensions


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: effect of raising income taxes

income effects

• reduces disposable income: people work more

substitution effects

• reduces opportunity cost of leisure: people work less

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


Benefits

cash benefits

means-tested benefits

universal benefits

benefits in kind

benefits and the redistribution of income

Benefits

cash benefits


universal benefits

benefits in kind


0

20

40

60

80

100

120

140Be

lgiu

m

Denm

ark

Fran

ce

Ger

man

y

Gre

ece

Irela

nd Italy

Neth

erla

nds

Portu

gal

Spai

n

Swed

en UK

EU15

2000

Social protection benefits in various European countries:(a) Expenditure per head: EU-15 = 100

Social protection benefits in various European countries:(a) Expenditure per head: EU-15 = 100

Source: Eurostat, 2003

% o

f E

U a

vera

ge

0

5

10

15

20

25

30

35B

elg

ium

Den

mar

k

Fra

nce

Ger

man

y

Gre

ece

Irel

and

Italy

Net

her

lan

ds

Po

rtu

gal

Sp

ain

Sw

eden U

K

EU

15

1990

2000

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

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

Source: Eurostat, 2003

% o

f G

DP


Benefits

cash benefits


universal benefits

benefits in kind


the problem of the poverty trap

tax credits in the UK

Benefits

cash benefits


universal benefits

benefits in kind


the problem of the poverty trap

tax credits in the UK

UK tax credits, 2003/4UK tax credits, 2003/4

Wages and the Distribution of Income

Documents