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"When I give food to the poor, they call me a saint. When I ask why the poor have no food, they call me a communist".
(Dom Helder Camera -former archbishop of Olinda, Recife, Brasil) (1984)
 
World indicators on the environmentWorld Energy Statistics - Time SeriesEconomic inequality
Basic Knowledge on Economics.- by Róbinson Rojas Sandford
Notes: 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17
Session 6

            The Theory of Distribution. Determination of the returns
            to factors of production: rent, interest, profits, and
            wages. The labour market and wage determination. Demand
            for labour as "derived". Wage differentials.
            What determines wage rates? Why do wage rates differ? How
            do they differ in the U.K.?
CONCEPTS FOR REVIEW:
                   Marginal productivity. Law of diminishing returns.
                   Supply of and demand for factors of production.
                   Competitive ( deregulated ) labour markets.
                   Monopolies and monopsonistic labour markets. Trade
                   unions bargaining power: economic effects.

How the market distributes wages, rent, interest and profits?

Capitalist economic theory uses the marginal theory of distribution
as a justification of the way in which reward to capital and labour
differ.

The Marginal Theory of Distribution is based on the following concepts:

1.- workers are paid in accordance with what they produce;
2.- gross profits (rent, interest and profits) is the difference
    between total revenue and total cost of labour;
3.- workers' labour adds to total output decreasing amounts because
    of the law of diminishing returns.
       _______________________________________________________
       therefore, a model can be built with the following
                  assumptions:
                  a) the larger the number of workers,
                     the smaller the output added to the total
                     output by the last worker,
                  b) the larger the number of workers,
                     the larger total revenue, but
                  c) because of a) marginal revenue decreases
                     while number of workers increases
                     (marginal revenue here is labelled as
                     'marginal revenue product' in textbooks);
                  d) because of c) average revenue decreases
                     while number of workers increases
                     (average revenue here is labelled as
                      'average revenue product' in textbooks); 
    Example:
             Number of   Total  Marginal   Average
             workers    Revenue Revenue    Revenue
               1          11      11         11
               2          21      10         10.5
               3          30       9         10
               4          38       8          9.5
               5          45       7          9
               6          51       6          8.5
               7          56       5          8
               8          60       4          7.5
               9          63       3          7
              10          65       2          6.5
              11          66       1          6
       ___________________________________________________________

4.- Each new worker will have to be paid a higher wage than the
    one before, because demand will increase. If we call the
    wage paid to the last added labourer "marginal cost of labour"
    we will have that marginal cost of labour will increase parallel
    to number of workers increasing. Because of the above, average
    cost of labour will increase also, and so Total Cost of Labour.
              A model can be built with the above:

           Number     Total Cost   Marginal Cost   Average Cost
          of Workers  of labour    of labour       of labour
              1           1             1              1
              2           3             2              1.5
              3           6             3              2
              4          10             4              2.5
              5          15             5              3
              6          21             6              3.5
              7          28             7              4
              8          36             8              4.5
              9          45             9              5
             10          55            10              5.5
             11          66            11              6
      __________________________________________________________

Now, we can build a final model which will illustrate concepts
1.- and 2.- of the marginal theory of distributions. This model
will tell us where the firm will "maximize" profits and will pay
the last worker hired "a fair wage", that is the value of that
worker's marginal revenue product.
With the above data:
MRP = marginal revenue product
ARP = average revenue product
MCL = marginal cost of labour
ACL = average cost of labour
TR  = total revenue (ARP x number of workers)
TC  = total cost    (ACL x number of workers)
GROSS PROFITS = TR - TC

Workers  MRP   ARP   MCL   ACL  TR   TC   GROSS PROFITS 
 1       11    11     1    1    11    1      10 
 2       10    10.5   2    1.5  21    3      18
 3        9    10     3    2    30    6      24
 4        8     9.5   4    2.5  38   10      28
 5        7     9     5    3    45   15      30
 6        6     8.5   6    3.5  51   21      30--->the firm will stop
 7        5     8     7    4    56   28      28    hiring workers here
 8        4     7.5   8    4.5  60   36      24
 9        3     7     9    5    63   45      18
10        2     6.5  10    5.5  65   55      10
11        1     6    11    6    66   66       0
________________________________________________________

From the above, the following findings:

-the firm will not maximize employment;
-the average wage for the work force is BELOW the marginal
 revenue product of the last worker hired;
-the more productive a worker is the larger the difference
 between total revenue and total cost, which will lead to
 further polarization in distribution of income.

Illustrating our findings, the following paragraph from Arthur Okun,
"Equality and Efficiency: the big tradeoff", Brookings Institution,
Washington, D.C., 1975:
   "The conflict between equality and efficiency is our biggest
    socioeconomic tradeoff, and it plagues us in dozens of dimensions
    of social policy. We can't have our cake of market efficiency and
    share it equally".
_______________________________________________________________________

Why wages are different?

Demand for labour is a "derived" demand, therefore it will fluctuate
with fluctuations in demand for different goods and services. Also,
supply of labour will fluctuate with levels of skills, experience, etc.
Even more, demand for labour can fluctuate because of non-economic
variables due to cultural habits, etc.

We can think of four groups of conditions which will make wage
differentials:

1) JOB ATTRACTIVENESS, such as
   danger,
   tedium,
   significant physical labour;
   significant intellectual labour;
makes supply of labour for the above relatively small, thus some
COMPENSATING DIFFERENTIALS could appear.
The reverse will happen if lesser levels of the above are required.

2)HUMAN CAPITAL, such as
    experience,
    education, 
    training,
will increase worker productivity on the one hand, and considering
that equal access to first quality education is inexistent, on the other
hand, supply of experienced, educated and trained workers will tend
to be relatively small, and compensating differentials will appear.
The reverse will be true for the overwhelming majority of the labour
force.

3) LABOUR MOBILITY, which is the ability/possibility of workers to
                    move from one area to another area;
the less mobility, the larger the differentials because the workers
                   will not be in a position to choose the best job
                   in a large area;
the more mobility, the less wage differentials.

4) DISCRIMINATION, which is treating people differently on a basis other
                   than individual merit;
   four main types of discrimination:
                   ethnic;
                   gender;
                   religious;
                   age.
________________________________________________________________________

A summary of the combined effects of the above on the economic status
in Great Britain, is given by the following table:

GREAT BRITAIN.- Spring 1995 (from Labour Force Survey,
                             Central Statistical Office)(Percentages)
                                             Pakistani/
MALES                 White  Black*  Indian  Bangladeshi  Other** ALL***
Working full time       72     49      65       41         51      71
Working part time        5      8       7        8          8       5
Unemployed               8     21      10       18         12       9
Inactive                15     22      18       33         29      15
                       100    100     100      100        100     100
-----------------------------------------------------------------------
Number in thousands  16,993   273     306      216        224   18,017
-----------------------------------------------------------------------
FEMALES
Working full time       38     37      36       12         30      38
Working part time       29     15      19        6         16      28
Unemployed               5     14       7        7          8       5
Inactive                28     34      38       75         46      29
                       100    100     100      100        100     100
-----------------------------------------------------------------------
Number in thousands  15,420   296     279      191        238   16,428
-----------------------------------------------------------------------
*Includes Caribbean, African and other Black people of non-mixed origin
** Includes Chinese, other ethnic minority groups of non-mixed origin
   and people of mixed origin.
*** Includes ethnic group not stated.
________________________________________________________________________

UNITED KINGDOM.- AVERAGE HOURLY PAY, 1994
               (Employment Gazette, June 1995) (£)
                     ALL         MEN       WOMEN
All origins         7.42        7.97       6.39
   white            7.44        8.00       6.40
   black            6.92        7.03       6.77
   Indian           6.70        7.29       5.77
    Pakistani/
    Bangladeshi     5.39        5.47       5.15
   Mixed/other
         origins    7.70        8.45       6.75
________________________________________________________________________

________________________________________________________________________
FOR THE UNITED STATES:
From U.S. Bureau of the Census
Workers Characteristics, for the 1990s
                                WHITE            BLACK
Median wealth of families,
with white index as 1OO         100                10
Percent of families with
wealth over $500,000              3.16              0.13

Percent of labour force who
are scientist and engineers       2.01              0.44
Percent of labour force who
are doctors                       0.47              0.15

Percent of 25-29 years old
with completed high school       86.6              80.9
Percent of 25-34 years old
college graduates                24.5              13.1

UNEMPLOYMENT RATES
Percent of adult men              3.9              10.8
Percent of adult women            4.1              10.0
Percent of teenagers             13.0              30.6
________________________________________________________________________