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Labour Market Inequality (Stylised Facts (Slow growth in wage and labour…
Labour Market Inequality
Fundamentals
Reasons:
- Productivity differences
- Differing rate of return to skills
- Discrimination
- Compensating differentials
- Market structure
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Measurements
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Wage gaps
- e.g. 90-10 wage gap = (Difference of total income between 90th and 10th percentile)/(10th percentile wage)
Stylised Facts
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No singular explanation for stylised facts:
- Technological change (countries have been developing, and higher-skilled workers benefit)
- Huge increases in demand for educated workers, and supply does not keep up
- Institutional changes (decline of unions + erosion of minimum wage, which has hardly increased over the years)
- International trade (easier flow of labour, which decreases bargaining power of workers)
- Changes in social norms.
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Generational Inequality
Summary
- Positive correlation between skills of parents and their children
- High-income parents typically invest more in education compared to low-income parents
- Tendency for income differences across families to get smaller over time
Countries which tend to have greater income inequality also tend to have greater generational earnings elasticity (higher persistence, less mobility).
- Suggests that high levels of income inequality can damage the generational mobility of a country.
Why does higher income inequality tend to lead to lower mobility?
- Parents want their children to do well
- In the 1970s, there is already a big gap between top-income and bottom-income parents in terms of expenditure on their children
- This has only widened since then, which may mean worsening mobility
Generational earnings elasticity:
- How much higher would a child's earnings be if the parents' earnings were higher?
- When this is higher, there is more persistence and thus less mobility
Technological Change
Luddite Fallacy: There will be total replacement of certain jobs/careers/professions/etc.
- However, it is likely that there will not be total replacement.
- Humans can have a comparative advantage as compared to technology and machines, which allow humans to continue doing certain jobs and professions
- Also, Luddite fallacy does not account for the decreasing wages which may come to be, with the take-up of technological alternatives. People themselves may not want to work for such low wages to compete with robots, and may voluntarily choose to cease working.
There could also be indirect replacement of people.
- Even non-routine tasks can be replaced by technology (think horse carriage drivers vs. cars).
- It is important to think about how technology can impact us and bypass a certain service or product.