Professional Documents
Culture Documents
Wages and The Distribution of Income
Wages and The Distribution of Income
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
Manufacturing
15
Services
Millions
10
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
Manufacturing
15
Services
Millions
10
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
Manufacturing
15
Services
Millions
10
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
Manufacturing
15
Services
Millions
10
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
Manufacturing
15
Services
Millions
10
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
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
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
18,000
16,000
14,000
12,000
10,000
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
Sectoral shift
from agricultural and manufacturing to
service-sector employment
Sectoral shift
from agricultural and manufacturing to
service-sector employment
freedom of entry
perfect knowledge
homogeneous labour
Market equilibrium
A labour market: whole market
Sall workers
in the market
Hourly wage
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
Sindividual worker
Hourly wage
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
Diminishing returns
set in here
Output
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
O Qe
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
derivation of the firm’s demand curve for
labour
Deriving the firm’s demand curve for labour
£
a
W1 MCL1
b
W2 MCL2
c
W3 MCL3
Profits maximised
where MRPL = MCL
MRPL
O Q1 Q2 Q3
Q of labour
Deriving the firm’s demand curve for labour
£
a
W1 MCL1
b
W2 MCL2
c
W3 MCL3
O Q1 Q2 Q3
Q of labour
Wage Determination in a Perfect
Market
Wages and profits under perfect
competition
Wages and profits
£
Wages
MRPL
O Qe
Q of labour
Wage Determination in Imperfect Markets
ACL W
(supply curve)
MRPL
O
Q of labour
Wage Determination in Imperfect Markets
ACL W
(supply curve)
W2
W1
MRPL
O Q1 Q2
Q of labour
Wage Determination in Imperfect Markets
W1
O Q1 Q of labour
Monopoly union facing producers
under perfect competition
£
S
Unemployment
W2
W1
O Q2 Q1 Q3 Q of labour
Wage Determination in Imperfect Markets
Bilateral monopoly
no unique equilibrium
relationship between wages and
employment
Bilateral monopoly
£ MCL1 S1 (=ACL1)
Monopsony:
no union
on
nion
i
un
o
No u
N
W1
MRPL
O Q1 Q of labour
Bilateral monopoly
£ MCL1 S1 (=ACL1)
x
W2 MCL2 = ACL2
Bilateral
monopoly
on
nion
i
un
o
No u
N
W1
MRPL
O Q1 Q3 Q of labour
Bilateral monopoly
£ MCL1
x
W2 MCL2 = ACL2
W1
MRPL
O Q1 Q of labour
Bilateral monopoly
£ MCL1
x
W2
W3 MCL3 = ACL3
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’ threats and promises
role of the government
Wage Determination in Imperfect Markets
self-selection
morale
Wage Determination in Imperfect Markets
types of workers
core workers
peripheral workers
The flexible firm
The flexible firm
Core group
Primary labour
market
Functional
flexibility
The flexible firm
Core group
Primary labour
market
Functional
flexibility
Self-employment
The flexible firm
Core group
Primary labour
market
Functional
flexibility
Self-employment
The flexible firm
Core group
temporaries
Primary labour
Agency
market
Functional
flexibility
Self-employment
The flexible firm
Core group
temporaries
contracting
Primary labour
Agency
Sub-
market
Functional
flexibility
Self-employment
The flexible firm
Core group
temporaries
contracting
Primary labour
Agency
Sub-
market
Functional
flexibility
Increased
outsourcing
Self-employment
The flexible firm
Core group
temporaries
contracting
Primary labour
Agency
Sub-
market
Functional
flexibility
Se
p
co
ou
nd
gr
peripheral
Increased
outsourcing
Self-employment
The flexible firm
Core group
temporaries
contracting
Primary labour
Agency
Sub-
market
Functional
flexibility
Se -
Sh m
p
co
ou
co
ter acts
ort
nd
gr
ntr
peripheral
Increased
outsourcing
Self-employment
The flexible firm
Core group
temporaries
contracting
Primary labour
Agency
Sub-
market
Functional
flexibility
Se -
Sh m
p
co
ou
co
ter acts
ort
nd
gr
ntr
Pu peripheral
Su blic
Tra bsid
ine y
es
Increased
outsourcing
Self-employment
The flexible firm
Core group
temporaries
contracting
Primary labour
Agency
Sub-
market
Functional
flexibility
Se -
Sh m
p
co
ou
co
ter acts
ort
nd
gr
ntr
Pu peripheral
Su blic
Tra bsid
ine y Delayed
es
recruitment
Increased
outsourcing
Self-employment
The flexible firm
Core group
temporaries
contracting
Primary labour
Agency
Sub-
market
Functional
flexibility
Se -
Sh m
p
co
ou
co
ter acts
ort
nd
gr
ntr
Pu peripheral
Su blic b
Tra bsid Jo ing
ine y Delayed har
es s
recruitment
Increased
outsourcing
Self-employment
The flexible firm
Core group
temporaries
contracting
Primary labour
Agency
Sub-
market
Functional
flexibility
Se -
Sh m
p
co
ou
co
ter acts
ort
ti m r t
nd
gr
ntr
Pa
e
Pu peripheral
Su blic b
Tra bsid Jo ing
ine y Delayed har
es s
recruitment
Increased
outsourcing
Wage Determination in Imperfect Markets
types of workers
core workers
peripheral workers
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%
Next 20%
4%
9%
Middle
20%
Top 15%
48%
20%
24%
Next 20%
Income before
taxes and benefits
Size distribution of UK income by
quintile group of households: 2001/2
Bottom Bottom
20% 20%
Next 20% Top
4% 6%
20% Next 20%
9% 11%
Middle
20%
Top 15% 45%
48% 16%
20%
Middle
20%
24%
22%
Next 20%
Next 20%
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
1%
9%
3%
4%
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
1% 1%
9%
3% 12%
4%
7%
7% 4%
9%
77% 67%
1970 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
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
Medical practioners
Personnel managers
Secondary teachers
Nurses
Women's earnings
Factory lineworkers Men's earnings
Clerks
Sales assistants
Bar staff
£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 more one woman, on one woman one woman, four or more
Source: Family spending (ONS,2003) children state pensions (not retired) two children children
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 more one woman, on one woman one woman, four or more
Source: Family spending (ONS,2003) children state pensions (not retired) two children children
Causes of Inequality
unemployment
The Redistribution of Income
Taxation
tax and income
proportional
progressive
regressive
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 benefits
universal benefits
benefits in kind
2000
120
100
% of EU average
80
60
40
20
UK
EU15
Italy
France
Spain
Greece
Ireland
Belgium
Sweden
Denmark
Germany
Portugal
Netherlands
20
15
10
UK
Italy
EU15
Spain
Ireland
France
Greece
Belgium
Sweden
Portugal
Denmark
Germany
Netherlands
Benefits
cash benefits
means-tested benefits
universal 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