Distribution effect
The distribution effect describes the income structure in an economy . The distributions of wages and capital are considered via gross national income and national income . The wage distribution is divided into the so-called wage spread and wage compression, with the capital distribution including interest and dividends that flow to capital providers . The distributional effect can be found in international macroeconomics in the area of technical progress, wages and unemployment.
Alternative definition
The distributional effect deals with the factors or causes that determine income in a market economy .
Macroeconomic context
National income, which describes the disposable income of private households, forms an important component of gross national income.
National income y is made up of labor w and capital income r :
Investment income is the term used to describe the compensation to investors in the form of interest and dividends for borrowed money, which is normally used for investments , e.g. B. Machines, used by companies. This capital is used by companies for so-called value creation , i.e. to manufacture products and thus earn money. The companies have to pay compensation to the financiers for this earned money. Thus, the investment income is comparable to the wages paid for the production factor labor.
The earned income denotes the amount that comes about on the basis of a concluded employment contract between an employer and an employee. In most cases, the amount of wages depends on the level of training or the specialist knowledge of the individual employee. In addition, physical and psychological resilience and the scope of the responsibilities assumed play a major role. The labor income thus forms the compensation for the production factor “labor” and corresponds in terms of amount to the value added share of labor.
When considering the distributional effect, the labor or wage income is subdivided into the wage spread and wage compression. These two criteria should now play the primary role when considering the distributional effect.
Wage spread
The wage spread describes the differences between the income levels of different economic agents. A wide wage spread is observed when the relative wages of employees with a comparatively low level of qualification have fallen, while there is an increase in the relative wages of employees with a higher level of qualification. The wage spread therefore relates to an imbalance in wage development. From an economic point of view, however, a certain degree of wage spread is important in order to do justice to the very different capabilities of industries, companies and, above all, employers and employees. A differentiated wage structure creates an incentive for employers as well as employees to invest in training and further education. Employers aim at highly qualified employees and employees at higher wages.
Causes of the wage spread
- Wage-setting behavior of companies, which is characterized by ever-increasing differences in qualifications among the workforce. This fact explains the simultaneous occurrence of overqualification and wage spread.
- Technical progress, d. This means that routine activities such as assembly line work are becoming increasingly scarce and the focus is shifting to high-quality and flexible workplaces. Due to the intensified competition for particularly efficient employees, the offered wages rise steadily in order to be able to keep them in the own company.
- Companies' labor force selection based on qualifications
- Different educational level of potential employees
- The amount of the wage depends on certain characteristics of the work:
- Degree of danger and comfort
- Difficulty in implementation
- Chances of success
- Career prospects
- Basis of trust between company and customer
Consequences of the wage spread
- Increasing division of the population according to their education and income
Wage compression
Entrepreneurial view
The workers who earn the most are the cheapest for the employers. This means that the benefits resulting from the employment of particularly capable employees exceed the additional wage costs. It is estimated that a worker who performs 10% more than another worker gets almost 3% more wages. As a result, the labor costs for this worker would be almost 7% lower per piece. It should also be noted here that the much more productive worker utilizes the machines and tools better and thus causes lower capital costs per output unit . The result is that companies often use costly selection processes to pick the best employees from the pool of applicants.
Employee view
In contrast to the wage spread, a compressed wage structure can often be found in centralized and coordinated negotiation systems. It occurs when there are only minor wage differences between employees. One reason for this can be a high general level of education. This means that a uniform level of training results in relatively equal pay. On the other hand, one reason can also be that low-productivity jobs are lost due to excessively high minimum wages . The productivity of the workers in these jobs would therefore not be sufficient to generate the minimum wages. Thus, the reward would be greater than the economic benefit for the company. Conversely, wage compression can greatly reduce the employment opportunities of low-skilled workers or their chances of entering the market.
Causes of wage compression
- A roughly uniform level of education for employees
- High minimum wages prevent large wage spreads
- High worker productivity
Consequences of wage compression
- Similar income levels in the population
- Creating incentives for
- Employers to invest in human capital
- Employees to exhaust further training opportunities
- Elimination of less productive jobs
Conclusion
In general, it can be said that countries with relatively high statutory or collectively agreed minimum wages show a smaller spread in the wage structure. This has the advantage that a certain level of remuneration is guaranteed. However, this situation often leads to the loss of low-productivity jobs, which increases the unemployment of low-skilled workers and also creates enormous barriers when looking for a job.
A long-term forecast of the distributional effect in the industrialized countries tends to suggest that labor-saving technical progress will result in increasing inequality. Technological innovations will increasingly replace simple work. The demand for low-skilled workers will continue to decline in the future, as they are no longer able to operate highly productive and flexible manufacturing plants. In addition, there is an exchange of human labor for robots that neither get sick nor demand high social security contributions.
Comparison between Germany and the USA
Germany is an example of a compressed wage structure. Here, the salary of an earner in the top 10% is three times as high as that of a low-income worker in the bottom 10%. In the USA, on the other hand, we find a pronounced wage spread. Here the value is 4.6 times. One reason for this may be that the private service sector with low wages has grown faster in the USA than in Germany. In conclusion, the employment rate in the USA has increased with low wages and led to greater wage differentials. Furthermore, there is a trend in the USA that the number of those employees who are in possession of a higher qualification than would be required for their jobs has increased sharply. In Germany, the lack of wage differentiation in the low-wage sector is seen as an important cause of the poor employment trend. This leads to the problem that people whose productive skills are below the minimum wage rate cannot be employed profitably for companies. With wages that are more flexible downwards, i.e. a higher wage spread, the less qualified employees in Germany could find employment again. In the US meanwhile, wage inequality is very high, but unemployment is lower.
Individual evidence
- ↑ Definition: investment income (accessed: April 9, 2008, 5:35 pm CET)
- ↑ Definition: Income from work (Accessed: April 3, 2008, 5:40 p.m. CET)
- ↑ a b Definition: Long-term distributional effects (Accessed: April 9, 2008, 6:05 pm CET)
bibliography
- Olivier Blanchard and Gerhard Illing: Macroeconomics . 3rd, updated edition. Pearson Studium, Munich, 2004, ISBN 3-8273-7051-5
- Paul A. Samuelson and William D. Nordhaus: Economics, the international standard work of macro and microeconomics . mi-Fachverlag, Redline GmbH, Landsberg am Lech, 2005, ISBN 3-636-03033-7
- Werner Eichhorst, Stefan Profit and Eric Thode: Benchmarking Germany: Labor market and employment . Springer-Verlag Berlin Heidelberg, 2001, ISBN 978-3540417583