wage differentials advantage and disadvantages

• Why can wage differentials be considered a good thing for an economy?

  They can promote strong incentives for workers
• How does the existence of wage differentials potentially incentivize individuals?

  To educate themselves and gain skills
• How can a more productive labor force benefit the economy?

  It can bring down costs for businesses
• What is the effect of a more productive workforce on long-run aggregate supply (LRAS)?

  It shifts the LRAS curve to the right
• What do free market economists suggest regarding high wage earners?

  They benefit those on low wages through spending
• What is the "trickle-down effect" in the context of wage differentials?

  High earners' spending creates multiplier effects
• How do high-wage earners potentially contribute to job creation?

  By creating jobs for lower-wage workers
• How do progressive income tax systems impact high wage earners?

  They pay more income tax
• How can government use revenue from higher income tax rates?

  To redistribute and give an income boost
• What incentive do wage differentials provide to entrepreneurs?

  The opportunity to earn extremely high wage
• What broader economic benefit arises from encouraging enterprise?

  Long run growth
• How might entrepreneurship benefit individuals at the lower end of the wage spectrum?

  May create jobs and higher wages
• How can entrepreneurs potentially drive down prices for consumers?

  Through driving down costs
• How does the existence of wage differentials encourage work?

  By incentivizing people to get off welfare
• What happens if all labor markets are perfectly competitive?

  There is no incentive to get off welfare
• How do wage differentials impact government finances?

  There is less strain on their finances
• How do wage differentials promote efficient allocation of resources?

  Labor moves where it's most productive
• What signals workers to move into professions where they are most suitable?

  The wage
• What is a major problem associated with wage differentials?

  Income inequality
• What is the impact of income inequality on the poor?

  They live in poverty
• What is one reason why governments dislike high income inequality?

  Increased unemployment benefit payouts
• How can large income inequalities affect economic growth?

  It reduces growth in the long run
• Why does restraining the income growth of the poor restrain spending?

  They have the highest propensity to consume
• What is the marginal propensity to save of the rich?

  The highest
• What are some of the social costs of income inequality?

  Higher crime rates
• What negative equalities result from high income inequality?

  Government spends more on police services
• What assumption about the trickle-down effect may not hold?

  High income earners may save more
• What might high-income earners do with their money that prevents the trickle-down effect?

  Send their money abroad
• How would avoiding or evading taxes affect income redistribution?

  Redistribution policy won't occur
• What problem arises if the government is a monopsonist employer?

  Dealing with the problem becomes difficult
• Why might a government not want to rapidly increase wages in monopsonist industries?

  They'll lose control of inflation
• How does weighing up the income inequality argument impact evaluation?

  Compare the costs relative to the benefits
• What is the impact of small income inequality?

  More benefits than costs
• How do you question the risks of government failure in evaluation?

  If risks are high, let wage differentials exist
• How do you question short run vs long run?

  Short run may be issues, long run better
• What is the impact of income inequality getting out of control in the long run?

  More problems than benefits
• What are the incentives that can come from wage differentials?

  • Education
  • Gaining skills
  • Boost productivity
  • Access higher wage professions