Chapter

The Labour Market and the Distribution of Income: The Neo‐Classical Approach

Tsuneo Ishikawa

in Income and Wealth

Published in print February 2002 | ISBN: 9780198288626
Published online November 2003 | e-ISBN: 9780191596469 | DOI: http://dx.doi.org/10.1093/019828862X.003.0003
 The Labour Market and the Distribution of Income: The Neo‐Classical Approach

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This chapter addresses the question of how the resources of labour power are supplied to alternative uses from the neoclassical viewpoint of individual rational choice, and further explains various modifications made to the framework of analysis, which are designed to cope with circumstances peculiar to the labour market that cannot be handled well in a standard framework of market clearing. Section 3.1 formulates the theory of general equilibrium for an economy with heterogeneous abilities and heterogeneous jobs, and derives some fundamental properties governing the distribution of income; in particular, it answers the supply‐side questions of how people's diverse abilities are allocated to different job types and how people's preferences for types of job affect such a process; and discusses implications of these on the size distribution of income. Section 3.2 discusses the possibility that each person's ability might change over time, in particular that it might be modified into a more valuable one at the expense of economic resources. Section 3.3 discusses the types of labour market equilibrium that obtain when each person's ability is imperfectly revealed––more specifically, asymmetry of information exists between the workers and the employer in that every worker knows his or her ability perfectly well while the employer cannot observe it directly. Section 3.4 again discusses the implications of informational imperfection, but this time imperfection falls equally (or symmetrically) on workers and employers.

Keywords: ability; asymmetry of information; income; income distribution; informational imperfection; job preference; labour; labour market; labour market equilibrium; neoclassical economics; theory of general equilibrium

Chapter.  42718 words.  Illustrated.

Subjects: Public Economics

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