This paper examines the relationship between labor market dynamics and income inequality, focusing on why standard supply-and-demand models fail to explain persistent wage stagnation alongside rising GDP and top-bracket earnings. Drawing on regional and longitudinal studies, the paper explores how wage levels — more than employment levels alone — mediate social outcomes such as crime rates. It considers why even robust economic growth only slows, rather than reverses, income inequality. The paper also evaluates the limited effectiveness of legislative and regulatory interventions, arguing that traditional policy frameworks are inadequate and that new models will be needed to address the widening wealth gap, particularly in the United States.
Studies of the labor market have long struggled to explain the relationship between supply and demand with the income or wage levels the labor market offers. The volatility in both of these areas — that is, volatility in both the demand for labor and in wages — has made it all but impossible to design an adequate model that effectively predicts or explains income based on labor market demand. Although certain large-scale trends can be tentatively suggested, they do not appear to hold up under examination of specific periods of change, or of stagnation. One particular issue that has come to the fore in recent years, due to increased public attention, is the growing income gap. This gap remains unexplained by current understandings of the labor market and is thus a source of continued investigation.
While GDP and top-bracket earnings have increased tremendously in many developed countries over the past three decades, wages for those actually participating in the labor market have remained essentially flat or even declined slightly when controlling for inflation (Doyle et al., 1999; Black & Sanders, 2004; Calderon et al., 2004). This wage stagnation has been cited as the cause of a host of negative social issues, generally related to poverty and basic societal inequalities, including increases in crime and the emergence of gray markets for many products in specific localized areas (Coyle et al., 1999; Black & Sanders, 2004). Understanding the mechanisms by which the labor market creates or perpetuates this income inequality is therefore of direct practical importance.
A careful study comparing employment levels, wage levels, and crime rates in specific localities over a substantial period of time found that crime rates — long associated with higher rates of unemployment — are more directly mediated by wage levels than by employment status alone. That is, localities that experienced a significant increase in wage levels saw a greater reduction in crime rates than localities that only experienced a rise in employment levels, all else being equal (Doyle et al., 1999). It is generally assumed that wage and employment levels are connected in the labor market just as demand and price are connected in any other market, where price rises when demand increases assuming a constant supply, and where supply tends to increase in response to higher demand and price. However, these connections do not appear to be as direct or as significant as they are in other markets, complicating many related issues (Doyle et al., 1999).
"Strong economies slow but don't reverse inequality"
"Direct regulation shows limited effectiveness on inequality"
Reducing income inequality is a complex and important task for governments and labor markets the world over in the coming decades. In the United States especially, the income inequality and wealth gap has reached exponential proportions and is almost certainly not sustainable over the long term. Addressing this issue will almost certainly require governmental intervention; however, current modes of policymaking and even basic perceptions of the problem will not be sufficient. More relevant and valid models will need to be developed.
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