Economic Uk Labour Market

The UK labour’s market have seen a significant increase in income inequality. The labour market is “a market in which wages, salaries and conditions of employment are determined in the context of the supply and demand for labour.” (Bannock, G Et.al 2003) This disparity in income can be seen from the Gini coefficient, which is a widely used measure of inequality, at an all-time high in recent years, with a significant increase since 1980. This trend is unlikely to reverse especially as income inequality had not decrease during the previous Labour government despite its comprehensive measures aimed at reducing income inequality. This essay aims to describe the reasons of the growing income inequality in the UK and the extent to which it is possible or desirable for the UK government to try reverse this trend.
Demand for labour in the labour market is a ‘derived demand.’ This means that employees are demanded because there is a demand for the final good or service. (Gillespie, A 2007, 230) In a perfectly competitive labour market, wages for labour is determined by supply and demand for labour, with the wage rate being at the equilibrium level. When the wage rate is higher than the equilibrium, there will be an excess supply of labour as people are attracted to the high pay. This will lead to decreasing wage rates as a result of the excess supply until equilibrium is reached at W1 where quantity supplied equals quantity demanded. The similar theory applies directly opposite when wage rates are below equilibrium levels as shown from the diagram below.

The perfectly competitive labour market means that all employees would be paid the same. Under this model, workers will be attracted to the industry that pays higher wages, thus leaving the industry with lower wages resulting in a decrease in supply of labour. The decrease of supply of labour will then bring up the equilibrium wage in the market. Likewise the increase in supply of labour in the higher paid industry

References: Bannock, G., Baxter, E., and Davis, E. (2003) The Penguin Dictionary of Economics (7th Edition). London; Penguin. Gillespie, A. (2007) Foundations of Economics. Oxford; Oxford University Press. Miller, R. (1996) Measuring what people know: human capital accounting for the knowledge economy, Paris, OECD (2010) How union membership has grown- and shrunk [online], Wilkinson, R. & Pickett, K. (2009) The Spirit Level: Why Equality is better for Everyone, Great Britain, Penguin Books Nightingale, K Sloman, J. (2006) Economics (6th Edition). Essex; Pearson Education Limited. Bannock, G., Baxter, E., and Davis, E. (2003) The Penguin Dictionary of Economics (7th Edition). London; Penguin. Gillespie, A. (2007) Foundations of Economics. Oxford; Oxford University Press. Mankiw ,G. (2009) Principles of Economics (4th Edition) Beijing; Cengage Learning Asia Miller, R Nightingale, K. (2002) Taxation: Theory & Practice, 4th edition, Essex, Pearson Education Limited Riley, G Sloman, J. (2006) Economics (6th Edition). Essex; Pearson Education Limited. Wilkinson, R. & Pickett, K. (2009) The Spirit Level: Why Equality is better for Everyone, Great Britain, Penguin Books (2010) How union membership has grown- and shrunk [online], Available: http://www.guardian.co.uk/news/datablog/2010/apr/30/union-membership-data [19 Nov 2010]