Are Widing Labour Market Earnings Differentials Entirely/Partly/Not at all Economically Rational/Justified/Inevitable?

Abstract

Discussion of changes to income distribution and inequality 1984/1998 has focused more on tax/transfer/ social policies than rewards in the labour market. Yet the tax/transfer system is comparatively minor in effects relative to the wide market income distribution from the labour market and other sources (inherited wealth, dividends, rents etc.). Hence this paper asks whether labour market differentials need to be as wide as they are, why they are widening, and whether the economic justifications are real or resemble an emperor with no clothes. It discusses the standard neoclassical analyses of wage determination and differentials in the labour market and their limitations. Issues include whether marginal productivity theory is simply a circular trick, whether imperfections are inevitable in labour markets, and whether skills/productivity can be objectively measured. Consideration is given to institutional and feminist analyses. The paper concludes that earnings differentials within the standard economy are inequitably wide, counterproductive, and only tenuously related to productivity issues.