Labor Market, Wages and Income Inequality


LaborMarket, Wages and Income Inequality

LaborMarket, Wages and Income Inequality

Therecent report by the labor department reveals that more than 257, 000jobs were created in the month of January, which at the outset is anindication that the economy is in good health. In reality this hadsurpassed what authorities had projected for the month (230,000) andwas expected since in the last two months of 2014 the labor marketthere were signs that more and more jobs would be created. Thisreflected a 5.7 percent increase from the job created in the month ofDecember. More than 100,000 jobs were created in a span of threemonths which marked as the strongest pace of growth since 1997(Baltimore,2015).

Evenwith these growth in job opportunity the most critical issues relatesto the wages that ordinary laborers are receiving from the owners offactors of production. First it is important to recognize that a hugeproportion of the jobs created in the month of January were in thelow wage service sector. The report indicated that hourly wage hadonly increased by 0.5percentfrom the previous month. In the figurebelow illustrates movement in the labor market as occasioned by theincrease in demand for labor. It is worth noting that the increasedjob opportunities have increased the demand f labor in the sense thatpeople have more opportunities meaning they can afford to beselective.

Thediagram illustrates what happens to wages and employment as thedemand for labor increases in the economy. The change in labor demandis indicated by D. An increase in labor demand in noted by the shiftin labor demand from D1 to D2. As can be observed the shift in demandof labor has pushed the average wage in the economy from W1 TO W2,and has amplified employment by from L1 to L2. In the case of theUnited States labor market that increase in wages from W1-W2 would beequivalent to the 05% increase in wage.

Cyclicforces are starting to tilt the balance towards the growth inpurchasing power of individuals who are at the bottom of the incomedistribution. Ordinarily when the labor market tightens there is ahigh tendency for the compression of income distribution amongindividuals in the lower last quartile of the labor market(Rittenberg, L., Rittenberg, Libby., Tregarthen, &amp Flatworld,2008). The 0.5% increase in the hourly wage as reported by the Bureauof statistic on February 6, is an indication that that the marginalproduct of labor has increased and that the productivity of firmshave increase (number of firms has risen) and that the price ofcommodities that the labor force produce has gone up. In indeed thisis true bearing in mind that commodity prices had increased duringthe last three months in2014. It is also imperative to state that theMPL can rise as a result of improvement of technology, an increase inthe use of other factors of production and human capital.

Ascan be viewed from the diagram an increase in demand for labor as aresult of creation of more job and opportunities due to improvedproductivity will shift the demand curve, push the wage rate higherincrease the level of employment. Demand of labor is pegged on themarginal product of labor and the prevailing price of output. In thislight any element that affects the output or productivity will havethe capacity to shift the labor demand curve.

Itis expected that the improving wages shall attract people who hadopted not to seek for employment due to lower wages back to the jobmarket and when this is combined with individuals leaving collegewill increase the pool of labor looking for job in the labor market.Consequently, the fact that firms are creating more opportunitieswills not significantly affect the demand of labor in the marketsince there is individual constantly searching for job opportunities.The 0.5 increase in the hourly wage is an illustration that theparticipation rate of individual in the job market is excellent andhence has necessitated improvement in daily wage.

Itis also worth noting that The main source of unemployment is theinability of the firm in the labor market to keep pace with theoutput generated by a worker per hour. This is referred to as to asthe economy wide productivity. It is apparent that productivity hasbeen constantly increasing, and so has been the hourly wage but notproportionately (Rittenberg, L., Rittenberg, Libby., Tregarthen, &ampFlatworld, 2008). This means that in spite of the fact that thoseindividual in the job market have improved and increased theirproductivity, the average wage prevailing in the labor market is notcommensurate to this phenomenon. This is more pronounced forindividuals working in the lower tier in the market and individualswho do not possess special skills or expertise. Notably, this is thegroup that have benefited profoundly from the increasing jobopportunities and unfortunately are expected to continue to put upwith from lower hourly vis a vis laborers in the upper quartile.Owners of factors of production have been the main beneficiary ofthis phenomenon since they can be in a position to claim higherincome while only allowing those workforces at the top of the payladder to claim a lion share of the total wages. Consequently, thegrowing rift between productivity and typical laborers is what needsto be trimmed down if we are going to make any momentous stepsforward in redressing the inequality in United States labor market.


Baltimore,C.W. (2015).The End of the Low-pay Puzzle. The Economist.Retrieved from:

Rittenberg,L., Rittenberg, Libby., Tregarthen, Timothy D., &amp FlatworldKnowledge. (2008). Principles of microeconomics. Nyak, New York:Flatworld Knowledge.