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 will ultimately bring down the wage rate to the point where wages are equal in both industries and when there is no further incentive to move between industries. This is shown in the diagram below.
However, in reality wage differences exists due to a number of factors. Firstly, geographical and occupational mobility undermines the ease of moving in and out of different industries. Secondly, the types and nature of jobs are all different and this affects people’s willingness to do them. Lastly the lack of information to all employees about the type of jobs available in the market also causes wage differences. All these factors means that the labour market in reality is a very imperfect market, which results in people earning different wage levels. Some people can earn considerably more than others if supply for their skills are limited in the market, leading to the problem of income inequality. According to a report by the Institute of Fiscal Studies, it was shown that income inequality ratio between the bottom 10% and top 10% have risen since 1980s, from slightly above 3.0 to now above 4.0. It is also interesting to note that the middle 60% of distribution suggests that inequality have decline under the Labour administration, but the tail of distribution tells a different story with the gap of both ends widening tremendously. The UK Lorenz curve as shown below has a Gini value of 0.36 in 2007/08.
This increase in the income disparity is due to several reasons. Firstly, globalisation plays a very crucial role in this. In recent years, international trade has increased substantially due to decrease in freight costs and prevalence of cheap labour in developing country. This means that importing goods made from there are cheaper than those produced domestically by developed countries like the UK. Countries like UK tend to import goods produced with unskilled labour and export goods produced with skilled labour as a result. (Mankiw, G 2009, 391) This has lead...