Putting It Together: Income Distribution

Summary

The goal of this module was to teach you to understand and evaluate how markets for factors of production affect society’s distribution of income.

Four photographs of a keyboard with the "shift" key replaced with words related to money. The shift key instead says "income," "profit," "earnings," and "interest."

Income, Earnings, Profit, Interest by GotCredit, CC-BY.

You learned how to:

  • Describe the incomes earned by the factors of production (land, labor, capital, entrepreneurship), i.e. wages, interest, rents, and profit
  • Analyze how perfect/imperfect competition between buyers and sellers of factors can impact wages, interest, and rents
  • Compare the marginal productivity theory of income distribution versus real world income distribution
  • Use the Lorenz Curve to analyze the distribution of income and wealth

Examples

Three photographs. The first shows a teacher leaning against a podium at the front of a classroom, the second shows a nurse with a patient in the hospital, and the third shows a professional basketball player.

Teacher by Sleepinyourhat, CC-BY-NC-SA. Faces of HCMC by Daniel Guy, CC-BY-NC-ND. Elton Brand by moneyjk89man, CC-BY.

Let’s return to some of the questions raised in the Why it Matters feature.

Teachers and nurses are paid less than professional athletes because the market values the former less than the latter.  In other words, our actions say that we are willing to pay professional athletes more than teachers and nurses.  This may be because athletes are employed through the private sector while most teachers and nurses are employed by the public sector where the lack of market forces makes it harder for workers to be paid what they’re worth.  Either way, it’s a statement about social values.

Urban sanitation engineers get paid a decent wage, not because of the skills required for the job, but rather because of the difficult working conditions in summer and winter.  Less “desirable” jobs have to pay more to attract workers.

Unionized workers earn more than non-union workers because unions are able to take advantage of monopoly power in the labor market.  Just as a monopoly in the output market can charge a higher price than would be charged if the market were competitive, so unions can charge a higher wage.

The following video explains part of the reason for the increase in income inequality in the U.S in recent years.