Introduction
Economic wage gap depicts the difference that exists between the high income earning individuals and the low income earning persons. The gap can either be adjusted wage gap or unadjusted wage gap. For the adjusted wage gap, it takes into consideration among other factors, the difference in the hours worked, the level of experience and the hours of schooling spend in receiving an education. For example, people with fewer years of experience generally receive a lower pay compared to people with more years of experience. As a result, it contributes to the economic wage gap.
On the other hand, the adjusted wage gap considers the different factors in establishing the remuneration. In the United States of America, the economic wage gap between the rich and poor is profound. Consequently, it has raised concerns about finding ways in which the wage gap in America can be reduced. Hence, the paper seeks to identify ways through which to reduce the economic wage gap in the U.S.A.
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Theories of Economic Wage Gap
According to the classical theory of the labor market, the determining factor for the wages is labor elasticity and the labor demand. Labor demand is defined by the Marginal Revenue Product (MRP). MRP of labor is the value associated with the last unit of labor. For example, if an extra worker is employed and produces five units which sell at a price of $2 in the market, it follows that the Marginal revenue product of labor is $10. Skilled workers are expected to produce more units. Thus, the highly skilled workers will command a higher wage rate since they have a high MRP. Also, highly skilled workers have an inelastic supply in the labor market. In contrast, workers with limited skills attract a lower wage rate.
The Feminist theories suggest that women face segregation in the labor market. Mostly, women are placed in the low paid sectors of the economy (Drydakis, 2018). The result of the gender bias leads to wage differentiation or the wage gap between women and men in the same skill sector. Feminist theories suggest that female-dominated jobs have lower remuneration as compared to male-dominated jobs that require similar skills. Thus, the proprietors of this theory suggest that where males control the societies by limiting the rights and opportunities of women in the family like education and employment, results to wage gap between male and female with the male having the more considerable value. Therefore, the feminist economist fights the male dominance in the labor market and fight for the freedom and more opportunities for women like economic choice.
In America, the wage gap is heightened by labor market imperfections. Such labor market imperfections include monopsony, asymmetric information, and the geographical immobility. As a result, this flaws in the market for labor contributes to the wage gap. It means that to reduce the wage gap in the United States calls for the elimination or reduction of this limitations.
Reducing Wage Gap in America
Elimination of monopsony power. In America, there are monopsony firms. For example “company town.” Monopsony is a sole purchaser in the market. In this case, it is the single employer. Markets in America where there is monopsony means there the level of competition is low which gives way for the economic wage gap. Such firms can set wages that are below the standard level.
Additionally, they limit the number of employees (Cahuc & Zylberberg, 2004). For workers, there is difficulty in switching between employers as the wages are low. The cost associated with moving from low paying employer to a high paying employer is high. Hence workers remain in the low paying firms. The federal government has a significant role in reducing the wage gap. It should set rules and put measures on how to eliminate monopsony power. One of the ways it can do so is to give subsidies for new firms to enhance competition so that there are equilibrium wages in the market. Another method is to provide tax holidays and tax exempt for companies that pay above the standard wages. As a result, the low paying firms will be motivated to raise their wages.
Strengthening the power of trade unions. Trade unions are essential in the labor market. Trade unions may work well in the industries that have the monopsony power. The reason is that these unions have higher bargaining power for the employees. Firstly, trade unions stipulate that higher wages result in higher productivity. It can be supported by the efficiency wage theories that are for the same idea. Also, trade unions help to increase the productivity of their members by introducing new working practices. Hence, the trade unions have an unlimited role in closing the economic wage gap in the United States.
Investment in education. According to the life cycle income hypothesis, the level of education that one receives at the early ages, determines the level of income at a later point in time. People who fail to invest in education, later suffer from lower wage income. On the other hand, people who invest in quality education and spend more years in school receive higher compensation for their education (Fasih, 2008). From this, persistent wage gap across generation in the U.S. Education investment with programs like Head Start can shrink the American economic wage gap.
Use of Progressive tax code. Ironically, the tax rate of the top income earners in America has been declining despite the drastic increase in their income and the level of wealth (Newman & O'Brien, 2011). On the other hand, the low-income earners pay a higher tax rate that takes away the little they earn. The result is that the economic wage gap continues to widen. To curb this problem, the federal government should consider using a progressive tax method. With this method, the high-income earners progressively pay a higher tax. The tax collected can then be used to help those individuals with a low level of income. Hence, a progressive tax code will help to shrink the wage gap in America.
Conclusion
The research paper provides ways that can help to shrink the wage gap in the United States. It identifies market imperfection that widens the wage gap. For example, monopsony power is designated as the contributing factor to different wage levels. Strengthening trade unions are recognized as a critical aspect to shrink the wage gap. Also, investment in education is essential in solving this problem. The paper provides details of the importance of education in one’s earning life. Lastly, the paper suggests the application of progressive tax method. A progressive tax code is accredited for its ability to reduce the economic wage gap. Therefore, the paper provides substantial ways to shrink Economic Wage Gap in America.
References
Cahuc, P., & Zylberberg, A. (2004). Labor economics . Cambridge, Mass: MIT Press.
Drydakis, N. (2018). Economic pluralism in the study of wage discrimination: a note. International Journal of Manpower , (just-accepted), 00-00.
Fasih, T. (2008). Linking education policy to labor market outcomes . Washington, DC: World Bank.
Newman, K. S., & O'Brien, R. L. (2011). Taxing the poor: Doing damage to the truly disadvantaged . Berkeley: University of California Press.
