7. Wage Inequality

Question 1

What is the distribution of wages in the UK?

Answer 1

Positively skewed so the mean is greater than the median

Question 2

How does human capital explain why wage distribution is positively skewed?

Answer 2

A worker invests in human capital up to the point where the MRR to the investment equals to the discount rate. Even if the distribution of ability is symmetric this generates a skew

Question 3

What is a controversial idea suggested about wage distribution?

Answer 3

The least able have the lowest rate of return to schooling so a policy to provide more education would fail

Question 4

What did Ashenfelter and Rouse find?

Answer 4

There is very little evidence that less intelligent people have lower RoR to schooling

Question 5

Lorenz curve

Answer 5

A graph showing cumulative % of total national income plotted against the cumulative % of the population

Question 6

How do you calculate the gini coefficient?

Answer 6

The shaded area between the 45° line and the Lorenz curve/ the area of triangle

Question 7

What are negatives of the gini coefficient?

Answer 7

It requires lots of data

A change in a few people at either extreme could impact the result

Question 8

Other measures of distribution

Answer 8

• wage gaps
• wage ratios
• log ratios
• variance of wages

Question 9

Reasons for why there is greater wage inequality

Answer 9

1. Globalisation
2. Skill biased technology
3. Labour supply changes
4. Labour market institutions

Question 10

How has wage inequality changed since 1980?

Answer 10

Wage inequality has increased over the last 30 years in almost all countries

Question 11

What does the simple framework tell us?

Answer 11

That the increase in inequality can’t have been mainly caused by supply shifts because we know the relative supply of skilled workers increased at the same time their wage increased

Question 12

How can it be that labour supply of skilled workers but wages for skilled workers still increased?

Answer 12

If the demand curve increased by a greater amount than the increase in supply

Question 13

What does globalisation include?

Answer 13

1. Increased trade in goods and services
2. Increased cross border investment and international production
3. Increased mobility of factors of production as well as goods

Question 14

Heckscher- Ohlin framework

Answer 14

The central idea is that countries export goods that intensively use the factors of production with which they are relatively abundantly endowed and import goods that use factors that are relatively scarce at home

Question 15

How does the Heckscher- Ohlin framework give an answer for increased inequality

Answer 15

Developed countries export skilled labour intensive goods and import unskilled labour intensive goods. This increases demand for skilled workers and reduces demand for unskilled workers in the developed country.

Question 16

Evidence of globalisation

Answer 16

• 1950-1973 growth in merchandise trade was 8.2% per year and then 4.5% from 1974 onwards
• china’s total imports and exports grew from $20bn in 1978 to $3,000bn in 2010

Question 17

What are reasons for why globalisation is unlikely to be the primary cause of increases in inequality

Answer 17

• timing of globalisation and increase in inequality don’t match that well
• there has been an increase in inequality in developing countries as well, H-O predicts reduced inequality
• within industry increases in demand for skilled workers, H-O predicts a between industry effect, increases in inequality in service sector

Question 18

What evidence is there that sudden import shocks have large and long lasting effects on labour markets?

Answer 18

• Autor Dorn and Hanson 2013 considered regions in US and measured the impact of China entering the WTO on each region
• those areas that are more exposed to chinese imports suffered larger employment and wage falls
• if workers moved easily between areas we wouldn’t expect wages to differ

Question 19

How does skill biased technological change occur?

Answer 19

Technological change might mean that new capital is a complement for skilled labour and a substitute for unskilled labour

Question 20

What evidence is there of the skill biased technological change?

Answer 20

• Krueger 1993 found computer users earned 15-20% more than others
• DiNardo + Pischke (1997) found that all kinds of white collar tools have a wage premium, even pencils

Question 21

What is the counter argument to Krueger and DiNardo’s evidence?

Answer 21

It seems there are unobserved differences between those who use computers or pencils and those who don’t

Question 22

What is the evidence of industry level effects of skill biased technological change?

Answer 22

•Machin + Van Reenen 1998 found that demand for skilled workers increased in all countries but increased most in industries with higher R&D

Question 23

How might labour market institutions have an impact on wage inequality

Answer 23

Institutions such as trade unions and min wages also determine wages and those institutions may vary across countries and time, subsequently have different effects on wage inequality