Labor Economics Study Set 5
Quiz 7 :
The Wage Structure
The increasing wage gap between high-educated and less-educated workers has been persisting over years. This is due to the high skills obtained by educated workers which add to his efficiency at work. The labor market rules state that high wage rate leads to a fall in demand for labor. But it has been observed over years that the both the supply of labor and wage rate level has increased due to higher demand for skilled labor in the market. The below graph explains the supply, demand and wage rate fluctuations in the market: Figure-1 The original wage rate W normally falls to W' when there is increase in supply of skilled labor from S to S*. But when there is increase in the demand of skilled labor, from D to D* , the wage rate rises from W to W*. Therefore, the claim that "the excess gain currently accruing to highly educated workers will soon disappear" might not hold true, as long as the demand for skilled labor is greater than the supply of skilled labor.
A skewed distribution shows that there is dispersion. The distribution can be negatively skewed or positively skewed. The wage distribution is normally positively skewed as shown in figure 1 below: Figure The positively skewed wage distribution indicates that large percentage of workforce shares less portion of income and the major portion of income is shared by small percent of workforce as shown in the above graph. It implies that the bulk of workers earn relatively low wages and that a small number of workers in the upper tail of the distribution receive a disproportionately large share of the wealth. Thus, it implies large number of worker work at low wages and earn less and low number of worker work at high wages and earn high.
Wage inequality gap increases or decreases due to various reasons. The following explains the effect on wage inequality. (A)Indexing the minimum wage to inflation: This would reduce the wage inequality gap as the minimum wage would increase with increase in inflation rate. (B)Increasing the benefit level paid to welfare recipients: This would increase the wage inequality gap as the welfare recipients would be skilled labors. Thus income of the skilled labor would increase as compared to the unskilled ones. (C)Increasing wage subsidies paid to firms that hire low-skill workers: Increasing wage subsidies for low-skill workers will reduce the wage inequality gap. (D)An increase in border enforcement, reducing the number of illegal immigrants entering the country: This would lead to less number of unskilled labors and hence would reduce the wage inequality gap.
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