Question

1. Distinguish between the market wage and the marginal wage. Why is the marginal wage significant to an employer and to a labor union?

2.Based on the distribution of personal income, should US taxes be adjusted to be:

More progressive;

More regressive;

Keep the distribution the same?

Thank you in advance for any help!

Answer 1

1. Distinction between Market Wage and Marginal Wage:

Market Wage : Without unions and collective bargaining, workers will be paid the market wage, which is the lowest wage an employer can pay to attract and keep the kind of employees he needs.

Marginal Wage : Marginal Wage is the wage at which worker are paid at a level equal to the marginal revenue product of labor.

Significance of Marginal Wage from Employer Perspective: It is the increment to revenues caused by the increment to output produced by the last laborer employed. This is because no firm would employ additional labor whose cost would exceed the revenue generated for the firm.

Marginal Wage Implication on Labor Union: Labor Unions strive to increase the marginal productivity of its workers. This is often done through training. Through collective bargaining, unions negotiate the wages that employers will pay. Unions ask for a higher wage than the equilibrium wage.

2. Based on the distribution of personal income, should US taxes be adjusted to be MORE PROGRESSIVE. A progressive tax is characterized by a more than proportional rise in the tax liability relative to the increase in income, and a regressive tax is characterized by a less than proportional rise in the relative burden. Thus, progressive taxes are seen as reducing inequalities in income distribution, whereas regressive taxes can have the effect of increasing these inequalities.