Economic Perspectives on Wage Inequality in the United Kingdom - Essay Example

?Economic perspectives on wage inequality in the United Kingdom It is fundamental in conventional economics that in a competitive market, the demand curve for labour represents that value of the marginal product of labour. In turn while the supply curve of a competitive firm is the marginal cost curve of producing the product beyond the shutdown point, the supply curve of labour represents the labour’s trade-offs in the choice between devoting time for work and leisure. It follows that under conventional economics, the equilibrium wage rate of labour can be inferred as a function of differential productivities or differences in labour’s preferences between work and leisure given the disparities in wage rate across gender, race, ethnicity or localities. Thus, one viable interpretation, not necessarily the correct interpretation, of the disparities in wage based on gender, race, ethnicity or localities that may be observed in the United Kingdom is that the disparities are due to the differential productivity of labour resulting from differences in gender, race, ethnicity, locality or on how each social group would trade leisure for work. Lately, however, economics have recognized the role of institutional and social factors on how wage rates may differ across social groups based on gender, race, ethnicity, or locality. The institutional or social factors may be a result of discrimination, differential power parity, or political dominance. There is not much theorizing in this area of study by conventional economists and, in the literature, the discrimination, differential power parity, or political dominance is typically not articulated by a comprehensive or fundamental socio-economic theory but by empirical models using dummy variables that represent stratification by any one of the social variables like gender, race, ethnicity, or locality. Those who have used empirical or econometric models to demonstrate wage inequality arising from social variables typically argued either explicitly or implicitly that wage inequality based on key social variables do not arise out of differential productivities nor as a result of behaviour differences in trading off work for leisure, but on differences in power parities or control over society. Figure 1. Demand and supply for skilled and unskilled labour before and after globalisation Source: Towers 2006, p. 6 At the same time, a phenomenon that is seen to be affecting how disparities are being affected by economic events is globalization. Towers (2006, p. 6), for instance, posited that with globalisation, the demand for skilled labour has shifted rightward while those for unskilled labour has shifted leftward. The rightward shift in the demand for skilled labour and the leftward shift in demand for unskilled labour are shown in Figure 1. The rightward and leftward shifts in the demand for skilled and unskilled labour, of course, is translated to higher real wage rates for skilled labour and lower real wage rates for unskilled labour. Based on Tower (2006, p. 6), therefore, it is also viable to argue that to the extent that skilled and unskilled labour has been associated with gender as well as gender dominance, exploitation, or the like, globalization can been seen as a variable that can exacerbate or moderate income inequality based on genders. Further, to the extent that opportunities or exposure to skills training and the like can differ across social groups, globalisation can also exacerbate or moderate income inequalities across races, ethnicity, and localities. Figure 2. Log wage differential between men and women in the United Kingdom 1978-1999 Source: Gosling and Limeux 2004, p. 280 The working assumption of the work of Gosling and Limeux (2004) is that there is wage disparity in the United Kingdom in favour of men. The log of differential shown in Figure 2, however, shows that wage rates of women are rising faster than the wage rates of men. Thus, Figure 2 suggests that with globalisation, women has been increasing their wage rates faster than the men's wage increases, making it possible for women to catch up with the wage rates of the men. Figure 3. Standard deviation on wage differential between genders in the UK 1978-1999 Source: Gosling and Limeux 2004, p. 280 Figure 3 indicate however that the both among men and women, income inequality has been worsening. Thus, what is suggested when we analyze Figure 2 against Figure 3 is that wage inequality may be decreasing between genders but new forms of inequality has been emerging in the United Kingdom. Figure 4 is the density log of wages in the United Kingdom during the years 1979, 1989 and 1998. Most importantly, Figure 4 indicate that real wages for both genders have been increasing for both genders from 1979 to 1998 even as males continue to have higher real wage in all years: 1979, 1989, and 1998. In sum, real wage for both genders are increasing but disparities continue from 1979 to 1998 even with an impressive wage growth for women compared to men that is shown in Figure 2. Figure 4. Density of log wages in the United Kingdom in 1996 pounds Source: Gosling and Limeux 2004, p. 282 Table 1. Standard wage differentials and between- and within-group variance of wages in the UK Source: Gosling and Limeux 2004, p. 285 Table 1 documents that wage differential between and within groups in the United Kingdom. The columns are divisions based on the variable time while the rows are divisions across the variables education and age. Table 1 suggest that inequality is decreasing between the A-O qualification level and those “without” qualification. However, inequality is increasing in an accelerating manner between University graduates and those with only A-O qualifications. In other words, inequality at higher levels of qualification is worsening or intensifying but “equality” among lower qualifications are improving. Needless to say, the combination of two results mean higher inequalities between those with higher education and those with lower education. Moreover, wage inequality across wage has negligibly moved: inequality across age improved in 1989 only to worsen again in 1998. This phenomenon has to be studied further for better interpretation. Figure 5. Changes in real male hourly wages by percentile Source: Harjes 2007, p. 8 In Figure 5, we are able to have a graphic description of real hourly wages by percentile from 1979 to 1986, 1986 to 1994, and 1994 to 1999. Figure 5 indicates that in all these years the lower income groups have been increasing their wages the lowest. Further, Figure 5 also indicate that more recent figures indicate that wage change are lowest among the lower income groups. Needless to say, Figure 5 indicates that inequality based on real wage is worsening. Table 2. Simulated and actual effect of the 1999 minimum wage on UK wage distribution Source: Gosling and Limeux 2004, p. 291 Table 2 is a simulation exercise on the effect of 1999 minimum wage on UK wage distribution. There are two key points from Table 2. The first important point is that the wage rate only insignificantly improve wage of the 5th and 10th percentile. The second important point is that the minimum wage increase maintained the inequality of wage between men and women in the UK. Figure . Real wages in United Kingdom, 1983 to 1998 Source: Towers 2006, p. 6 as adapted from Dickens and Ellwood 2001, p. 46 We therefore conclude based on the data available that wage inequality across social groups continues to be bad in the United Kingdom. Further, although wage disparity based on gender is slightly being eliminated, wage inequality based on education and skills are worsening. References Bell, B. and Reenen, J., 2010. Bankers’ pay and extreme wage inequality in the UK. London School of Economics and Political Science: Centre for Economic Performance. Dickens, R. and Ellwood, D., 2001. Whither poverty in Great Britain and the United States? The determinants of changing poverty and whether work will work. London School of Economics: Centre for Economic Performance. Gosling, A. and Lernieux, T., 2004. Labor market reforms and changes in wage inequality in the United Kindom and the United States. In: Seeking a premier economy: The economic effects of British economic reforms, 1980-2000. University of Chicago Press. Harjes, T., 2007. Globlisation and income inequality: A European perspective. International Monetary Fund. Prasad, E., 2002. Wage inequality in the United Kingdom, 1975-99.IZA Discussion Paper No. 510. Bonn: Forschungsinstut Zukunft der Arbeit Institute for the Study of Labour. Towers, D., 2006. Labor economics. Available from: http://www.towers.fr/essays/Factors%20that%20have%20led%20to%20the%20increase%20wage%20inequality%20in%20the%20UK%20over%20the%20last%20twenty%20years.pdf [accessed 9 January 2011] Read More