ECN105 Contemporary Economic Issues

Lecture 4
Labour Market and Income Distribution

The effects of education and the gig-economy

Lecture plan

• How does education affect the labour market and income distribution?
• A look at UK productivity: the Productivity Puzzle…
• The gig-economy and income distribution….
 Education, labour market and income distribution

What happens to employment, wages and income distribution if there is an

increase in the overall level of education?
 Education, labour market and income distribution
• A higher level of education makes each worker more productive
• A general increase in average education in the economy increases overall productivity (Total Factor
Productivity)
• At the pre-existing real wage, the result of higher productivity will be a higher profit for the firms
• Graphically, the labour productivity curve shifts up and in the first instance the markup increases
Labour
supply

 𝜆 1 Average product of labour ↑

 𝜆  Π Average product of labour, λ

Real wage

𝑝
 𝑊 Price-setting curve
𝑝 X

0 Employment, N
Employed
Unemployed
 Education, labour market and income distribution
• With higher profits, new firms enter and existing firms hire additional workers, which reduces the
unemployment rate
• Lower unemployment in turn makes it easier for a dismissed worker to find a new job
• It therefore increases the workers’ reservation position, raising the wage
• Workers both possess a better, higher-productivity endowment of labour time and enjoy better
Labour
prices for their endowment supply
 𝜆 1 Average product of labour ↑

 𝜆
Real wage

𝑊
 
 𝑊 𝑝 Price-setting curve
𝑝 X

0 Employment, N
Employed
Unemployed
 Education, labour market and income distribution

• In equilibrium, the real wage increases and unemployment falls

Labour
supply
 𝜆 1 Average product of labour ↑

 𝜆 𝑊
 
Real wage

Y 𝑝
 𝑊 Price-setting curve
𝑝 X

0 Employment, N
Employed Unemployed
 Education and Income distribution
100
• Here are now fewer unemployed workers.
Cumulative share of income (%)

• The segment of the Lorenz curve representing employed

workers is now flatter because even though the real wage
60 has risen, a larger fraction of the work force (85% instead
of 80%) receives the same 60% of the (now increased) total
output.
• The line segment for the owners is unaffected because the
same 10% of the population continue to receive 40% of the
output (their profits are higher but the share remains
unchanged)
0
Unemployed
0 510 90 100

Unemployed Employed Owners What is the new GINI coefficient?

Cumulative share of the population
from lowest to highest income (%)
Talking about productivity….. One topical issue to discuss next week….
 UK Productivity - Quarterly Output per hour worked (2016 = 100)
120.0

100.0
Output per hour worked (index, 2016 = 100)

80.0

60.0

40.0

20.0

0.0
1971 Q1 1973 Q2 1975 Q3 1977 Q4 1980 Q1 1982 Q2 1984 Q3 1986 Q4 1989 Q1 1991 Q2 1993 Q3 1995 Q4 1998 Q1 2000 Q2 2002 Q3 2004 Q4 2007 Q1 2009 Q2 2011 Q3 2013 Q4 2016 Q1 2018 Q2
 GDP Per Hour Worked in USA, UK, Germany, France and Italy (2010 = 100)
120

100
GDP Per Hour Worked (INex, 2010=100)

80

60

40

20

0
1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

USA UK Germany France Italy

 UK Productivity
Is a lack of productivity growth a problem?
• Yes, it is!
• Stagnant productivity means stagnant wages
• Stagnant wages mean an increase in income inequality
• Low productivity reduces competitiveness if other countries experience
productivity growth
• Negative repercussion for international trade and international
agreements
• So, why is UK productivity growth so low?
Labour Market and Income Distribution
The gig-economy
 Many Labour Markets
In reality, in any economy there are more than just one labour market and economies
experience Labour Market Segmentation

Primary Labour Market

• Workers might be represented by unions
• High wages
• Job Security
• “Good Jobs”
Secondary Labour Market
• Short-term contracts
• Limited wage and job security
• Young population or groups ‘discriminated’ against because of ethnicity, race or
other distinguishing characteristic
• Zero hours contracts (employers do not commit to providing work for any
particular number of hours)
• “gig economy”
 Labour Market Segmentation

Secondary Labour Market

• For any given endowment of skills

• Secondary Labour Market workers will usually receive a lower income than the
workers in the primary labour market
• Institutions benefit the workers in the primary labour market and disadvantage
workers in the secondary market, increasing income inequality
 Labour Market Segmentation and Income Distribution
100
• Lorenz curve with a segmented labour market
Cumulative share of income (%)

• The owners are not segmented because they can easily invest
their wealth in firms in either or both sectors and, as a
60
consequence, the rate of return will be the same in both
sectors

What is the GINI coefficient in such an economy?

10

0
0 10 50 90 100

Unemployed Secondary Primary labour Owners

labour market market

Cumulative share of the population(%)

 Labour Market Segmentation and Income Distribution
100

• The elimination of labour market segmentation means that

Cumulative share of income (%)

all workers receive the same wage

• Unless this affects the relative bargaining power of workers
60 and owners, it does not alter the share of the output going to
workers as a whole

Effects of elimination of
labour market segmentation
10

0
0 10 50 90 100

Unemployed Secondary Primary labour Owners

labour market market

Cumulative share of the population(%)

 Labour Market Segmentation and Income Distribution
100
• This is an illustration of the fact that much of the inequality in modern
economies is among employees
Cumulative share of income (%)

• Reducing these inequalities can significantly reduce the Gini

coefficient
60
• Where trade unions have reduced labour market segmentation and
narrowed the wage differentials among workers, inequality is lower
• An example is the so-called solidarity wage policy introduced in
Sweden
Effects of elimination of • The key principle is that workers and employers have a common
10 labour market segmentation interest in rapid productivity growth
0
• Workers could enjoy higher wages without the profits of firms
0 10 50 90 100 being reduced if more of the economy’s output was produced by
high-productivity firms rather than in firms with low productivity
Unemployed Secondary Primary labour Owners
labour market market

Cumulative share of the population(%)

Next Week

Class: Universal Basic Income

Lecture: Productivity and Income Distribution with an
introduction to “The UK Productivity Puzzle”
Readings

Econ CORE – Unit 9, Section 19.7