Good Example Of Microeconomics: Labor Market, Wages And Income Inequality Essay

Introduction

Like any other market of goods and services, labor market is also influenced by its demand and supply curves. Labor demand curve includes demand for labor as a factor of production in delivering goods and services to consumers. Labor supply curve includes people who are ready to offer their employment. Price determination or, more aptly, wage determination in a labor market takes place at the point where the labor demand curves meets its supply curve. However, unlike other markets, labor supply is less variable. The objective of this paper is to understand the wage and income inequality in a labor market using an article.
The paper is divided into three sections. The first section of the paper identifies a recent article and summarizes it. The second section of the paper analyses the issue raised in the article using economic concepts of microeconomics in labor market. The third section concludes the paper. The article chosen for analysis is titled “Higher Education, Wages, and Polarization” written by Rob Valletta (2015).

Article Summary

The article “Higher Education, Wages, and Polarization” is an attempt made by author to highlight the issue of income polarization or unequal distribution of wages in the labor market. The author is an eminent position holder in the research wing of an established bank in San Francisco. In this article, the author is trying to bring out the issue of wage gap between a college only and graduate (Valletta, 2015). The article has four key messages for the audience. First, the article articulates that higher education has become more important in skill-based jobs. It fetches higher income to individuals than having a mere college degree. Thus, it evidently becomes profitable for people to invest in higher education to have a better financial standing in future.
Second, the article establishes the higher wage earned by people with higher education using research on non-routine intellect based jobs. The author has analyzed the non-routine cognitive workers based on their education and found that there is a significant rise in this kind of job held by graduate-degree holders (Valletta, 2015). This is in addition to the reducing proportion of college only individuals holding these non-routine cognitive positions. This rising proportion of non-routine jobs held by degree holders is a good influencer of higher wages in the segment.
Third, the article uses a research by Beaudry, Green and Sand (2013) to reinforce that apart from fetching higher wages, there are other aspects of having a higher education degree that benefits people. This research concluded that, post-graduates have a competitive advantage over their college-only counterparts. Having an edge over their college-only peers gives higher degree holders an avenue to negotiate better on remuneration front and get paid better wages.
Fourth, the article brings out the point that given the prominent wage-divide, more people are opting for post-graduation degrees now given the lucrative income earning opportunity. This has been supported by researches that find higher number of skilled employees in various technical jobs. The author used the study by Lindley and Machin of 2013 that showed that ratio of post-graduates rose in computer based technical jobs.
The article concludes that having a degree of higher education or post-graduation is becoming increasingly common as it gives competitive-advantage and higher wage rates over the college-only people, in most cases. However, this does not mean that college-only people are not successful in job-market.

Microeconomics of Labor Market

This section of the paper discusses the concepts of microeconomics in context of the chosen article. The microeconomics of labor market works primarily on the labor demand and supply forces. The level of maturation of market also plays a role in determining these forces.

Labor Supply

Wage rate has a direct correlation with supply of labor. The higher the wage rate, more people will be willing to offer their labor and for more number of hours. Hence, with higher wage rate, number of labor hours offered will be higher. The article also reestablishes this fact in two main ways.
First, the article highlights that the income difference between college-only and degree-holders is high; this influences more people to consider opting for degree courses. This can be explained through the upward sloping labor supply curve (in Figure 1).
Figure 1: Labor Supply Curve
The Figure 1 is a basic labor supply curve with labor on x-axis and wage rate on y-axis. The curve depicts the relationship between wage rate and labor supply. The curve is upward sloping, which means that wage rate and labor supplied are directly proportional. As the wage rate increases, the curve slopes upward towards the right depicting that labor supplied also increases. The same phenomenon takes place in case of graduate and college-only population. As the wage rate for people having higher education degrees increases, more people have incentive to invest in degree courses and supply of skilled labor increases. This leads to the issue of higher wage gap in the population.
Second, people with better degrees have more bargaining power in the market given their competitive advantage and more skill to offer. Thus, they can negotiate better. While till now, the discussion was pertaining primarily to perfect or near perfect markets, this point pertains to a market where some constraint exists in labor supply. This bargaining power helps them fetch better rates, thereby creating wage divide among people. This is a more realistic scenario because in real life allocation of labor does not happen through random sorting (Murray and Nunley, 2013).
The dynamics of wage determination also depends upon the level of maturation of labor market. In an imperfect market, the wages paid will be lower if a firm has monopoly in the market. In a perfect market, determination of wages will be done at optimal level.

Labor Demand

The neoclassical model of labor demand begins with the premise that companies hire/fire employees due to changes in the demand for the goods that the firm produces (Murray and Nunley, 2013). The demand of labor is also determined by wage rate. Higher the wage rate, the quantity demanded will be lower. Contrary to labor supply curve, demand curve for labor is downward sloping. However, with advancement in technologies and competitiveness in market, demand for skill based jobs are on the rise. This results in higher demand in spite of wage rise in the skilled labor segment. The article reestablishes this point in two ways.
First, the author analyzes the non-routine cognitive workers based on their education and found that there is a significant rise in this kind of job held by graduate-degree holders (Valletta, 2015). The rise in jobs requiring higher education is an indication that demand for firm’s produce/services has undergone change in such a way that having larger proportion of skilled workers improves its effectiveness and offering to customer. However, this creates the issue for unskilled labors.
Second, the article finds that in jobs relating to computer and technology, higher education provided an added advantage to the candidature. With more companies becoming technologically savvy, the demand for non-routine workers is bound to increase. In short run, the supply is constant. Hence, higher demand tantamount to higher wage rate to attract talent in the company. This is because the shortage of labor due to higher demand would lead employers frustrated as they have to compete on wage front to find employees (Nelson, n.d.). This will pose an upward pressure on the labor wage rate and will lead to rise in wage rate for skilled worker. Thereby, creating wage gap between college-only and degree-holders.
However, the dynamics of demand and supply forces of labor also depends upon the level of maturation of labor market. Given the recent market composition and dynamics, there is a higher propensity of employers to offer attractive compensation for non-routine intellectual jobs than on regular jobs. This is because having a talent pool of employees improves a firm’s strength to deliver quality service to its customers.

Conclusion

A labor market is governed by labor demand and supply forces that determine wage rates. In the given article, the author debates that the demand for non-routine skilled workers is higher, which raises wage rate in the segment and creates wage divide between college-only and degree-holders. This issue is pertinent and caused by principles of microeconomics in the labor market.

References

Murray, James and Nunley, John (2013). Labour Economics. Retrieved from http://econocast.net/labor/
Nelson Educatioc (n.d.). Labour Markets and the Distribution of Income. Retrieved from http://www.sextonmicro2ce.nelson.com/student/section/ch11.html
Valletta, Rob (2015). Higher Education, Wages, and Polarization. Retrieved from http://www.frbsf.org/economic-research/publications/economic-letter/2015/january/wages-education-college-labor-earnings-income/