Income Inequality in the Labor Market Essay

Labor Income

The Labor Market and Income Inequality

Studies of the labor market have long struggled to explain the relationship between supply and demand in the labor market with the income or wage levels the labor market offers. The volatility in both of these areas -- that is, volatility both in the demand for labor and in wages -- has made it all but impossible for an adequate model to be designed that effectively predicts or explains income based on demand in the labor market; though certain large-scale trends can be tentatively suggested they do not appear to hold up in examinations of specific periods of change (or lack thereof). One of the particular issues that has come to the fore in recent years due to increased public attention, though it has been noted by researchers for some time, is the increasing income gap, which remains unexplained by current understandings of the labor market and is thus a source of continued investigation.

While GDP and top-bracket earnings have increased tremendously in many countries in the developed world over the past three decades, wages for those actually involved in what can be considered the labor market in many regions have remained essentially flat or even declined slightly (when controlling for inflation) (Doyle et al., 1999; Black & Sanders, 2004; Calderon et al., 2004). This has been cited as the cause of a host of negative social issues generally related to poverty as well as to basic societal inequalities, including increases in crime and the emergence of gray markets for many products in specific localized areas (Coyle et al., 1999; Black & Sanders, 2004). Understanding the mechanisms by which the labor market creates or perpetuates this income inequality is thus of direct practical importance.

A careful study that compared the elements of employment levels, wage levels, and crime rates in specific localities over a substantial period of time found that crime rates, long associated with higher rates of unemployment, is more directly mediated by wage levels than it is directly by employment status. That is, localities that experienced a significant increase in wage levels experienced a greater reduction in crime rates than localities that only experienced a rise in employment levels, all else being equal (Doyle et al., 1999). It is generally assumed that wage and employment levels are connected in the labor market just as demand and price are connected in any other market, where price goes up when demand goes up assuming a constant supply (and where supply tends to increase in response to increased demand and price), however these connections do to appear to be as direct…