Income distribution and the labour market

The chapter on ‘Income distribution and the labour market’ addresses firstly the issue of minimum wages and of efficiency wages. We show that minimum wages induce unemployment among unskilled workers. Moreover, we demonstrate that minimum wages for unskilled labour are an inappropriate policy instrument to change income distribution in favour of unskilled workers. We call this the ‘irrelevance theorem of minimum wages’. The distributional impact of efficiency wages is twofold: on the one hand, they tend to increase the inequality between the employed and the unemployed part of the labour force. On the other hand, efficiency wages are capable of diminishing the gap between wage earners and capital income earners. It is not yet clear whether there exists a stable trade-off between unemployment and overall inequality: the impression is that the USA (Europe) can pay the price for higher inequality of incomes (unemployment) with lower unemployment (inequality of incomes). Frequently, workers with different skill levels are represented by the same union; unions, however, have a tendency to reduce the spread of wages during negotiations with employers in comparison to a situation where each employee is paid according to their marginal productivity. It is important to have a considerable skewness in the distribution of wages if the goals pursued by the unions consist in raising the average wage rate and the total wage sum. If unions want to limit, at the same time, the size of wage dispersion, a classical ‘trade-off’ appears.