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Creating A Common Market For Labour Economics Essay

Who benefits and who loses when a common market for labour is extended to more countries? Explain your answer with reference to (a) economic theory and (b) EU experience.
This essay is going to look at the benefits/loses when a common market for labour is extended to more countries with reference to economic theory and the European union experience.
A common market is a Group formed by countries within a geographical area to promote duty free trade and free movement of labour and capital among its members. European community (as a legal entity within the framework of European Union) is the best known example. Common markets impose common external tariff (CET) on imports from non-member countries. When a common market for labour is extended to more countries member states have always feared their economies would hurt due to the cheap labour coming from inferior nations. Since labour mobility is part of the core freedoms in the Union, the Treaty of Rome that was put into effect in 1958 committed member states to allow for the free movement of labour. This veiled that nothing would stop labour from moving within member states and there will be no discrimination against workers based on their nationality.
In order to determine the effects of creating a common market for labour we have to
See how wages are determined within these economies and why they differ? Wages are determined by the marginal value of productivity (MVP) of the last labour unit employed in a firm, this is because the company can only afford to hire workers if they generate enough output to cover the costs of Thus wages are formulated where: conversely, the marginal value of productivity is different amongst countries within the European union for different reasons. e.g. A polish worker that has had the ability to benefit from a good state education system that teaches its students a wide variety of skills will have higher marginal value of Productivity than a worker from Sweden that was not able to finish high school. Also, the capital employed in Poland allows workers to maximize their marginal value of productivity since machinery employed Poland is more industrially advanced than machinery used in Sweden. Secondly, if workers in Poland receive more social benefits due to the institutional environment that drives for minimum wages and more privileges to workers will mean the workers will be ready to work harder. Hence from comparing of Poland and Sweden we have been able see that marginal value of productivity will be more in the wealthier nation, the wages will be higher and when the market for labour opens the tendency will be for workers to move from the low wage to the high wage economy.
Wages
productivityProductivity
Wages
productivityProductivity
Polish labour
productivityProductivity
Swedish labour
productivityProductivity
Wp Ws A B C
SwedenPoland Poland Sweden
Number of workers
(1) Figure 1 The diagram above shows the condition for the two economies before the introduction of Sweden into the common market for labour. Wp are the higher wages paid to polish workers whereas Ws are the lower wages paid to Swedish workers. The assumption is that Swedish and polish workers have the same level of skills, so what causes the marginal product of labour to be higher in Poland is their use of “improved” capital. When the common market for labour is extended to more countries, there is free Movement of labour between Poland and Sweden, so some Swedish workers will move to take advantage of the higher wages and production in Poland will rise, however, the marginal productivity of its workers will decline leading to reduced wage rates.
Dissimilarly in Poland since workers will be leaving even though production will decline, marginal productivity will increase leading to higher wages. This is all illustrated in the following diagram. PLP
SLP
Wages
productivityProductivity
Wages
productivityProductivity
Wp Wcm
A Ws B migrantsMigrants A B2 B1 C
Poland Sweden
Number of workers
(2) Figure 2 From the above diagram, migration from Sweden to Poland will occur from B2 to B1 and there will be output gain equal to triangle A and B, because, even though Swedish output reduces that amount is recaptured by the increase in polish output produced thus leading to a net gain in output. Furthermore, there will be a reduction in wages in Poland from Wp to Wcm and an increase in wages in Sweden from Wp to Wcm so wages will eventually converge in both countries to Wcm.
From the model illustrated, some conclusions can be brought into frame:
Firstly workers originally in the high wage country, in the diagram( i.e. Poland), will lose because wages will decline whereas workers that stay behind in the low wage country(Sweden), will benefit because of increase in wages .Producers in Poland will gain from the expansion of the common market because the inflow of cheaper workers will mean that they will produce a greater percentage of output at a lower cost within the customs union whereas producers in Sweden will lose out because the higher wages signify that they will account for a smaller percentage of
Output and will have a higher cost per unit produced. Moreover, the European Union as an entity gains due to the overall increase in output and the overall reduction in labour costs. From the above we could also conclude that immigration in the short term helps ease unemployment as labour moves from countries with high unemployment mostly linked with low marginal value productivity of labour to countries with lower unemployment shown through high marginal productivity of labour. Also the country that labour migrates to, benefits from the skills this labour acquired at home and the country receiving them didn’t have to pay for. Similarly the home country could benefit from the skills the labour gained in the foreign country if the labour returns.
Also, cost-push inflation is lowered as a result or reduction in the cost of l labour, this arises due to high costs of labour and consequently this inflation reduction will lead to higher growth rates. Since this model depends greatly on the theory we made of full employment, wage flexibility, capital fixed and wage differences arising from differences in capital as opposed to skill, we have to see if the conclusions we drew above from theory work by examining the extent to which they applied to European countries after the 2004 enlargement. Indeed we see that since the 2004 enlargement (when more countries joined the European union) there has been migration from eastern Europe to western Europe due to lower wages in the east and skill shortages in western Europe. Since the enlargement in 2004 when 10 countries joined the European Union, there has been fare that the incoming nations, some of which have a GDP of around 40% will destroy the European Union from one largest single market to an “economic burden”
In conclusion, from economic theory and of the effects of EU expansion, overall migration is beneficial for both the economy that workers leave from and for the country that receives the migrants. This is because the country they leave from gains investment from family members sending money back home and higher wages due to the increase in the marginal value productivity of labour and the country they go to gains competitiveness due to the fact that wages decline and gains in output due to the fact that it gets to utilize its high marginal productivity.

Effects of globalization in singapore

For more than 40 years, Singapore has enjoyed economic success, allowing Singaporeans to have a raised quality of life and standard of living. However, due to this increase in standard of living, this has caused income disparity (Yeoh, 2007/2008) among Singaporeans, between the low income families and the high income families.
This widening income gap was due to the side effects of the Singapore government’s pro growth policies (Yeoh, 2007/2008). However, the income gap was pushed even more by globalisation and the recessions from December 2007 until now, 2011. This caused the depression the unskilled workers’ salaries while inflating the skilled workers’ salaries. Thus, this caused the widening income gap in Singapore.
Due to the widening income gap, Singaporeans have become more aware of the differences in income among Singaporeans, which causes them to be more “class-conscious”. If the widening income gap continues to widen would cause unthinkable economic, social and political impacts in Singapore.
The main challenge policy makers face today is to seek a balance between income disparity reduction, economic growth and budget feasibility (Yeoh, 2007/2008). The policies are mainly to help the lower income families with the proper opportunities in order for them to move up the social and financial ladder. Policy makers should be aware that an overly egalitarian approach towards reducing income inequality is suboptimal. On the whole, the government needs to face the issue of widening income gap with an emphatic heart and mind, thinking for the needs of the people.
BACKGROUND
Singapore, which used to be a small fishing village, has done well in the last decades of the twentieth century to rise from an entreport centre to be a global city and a developed nation. It had resolved most issues pertaining to underdevelopment and had developed the needed institutions to prepare its survival in the twenty-first century. From 2000-2008, these years mark the period in which globalization as a process affected all parts of the world. These years were significant politically, socially and economically for Singapore. (Amaldas, 2009)
One part in this paper that we would like to focus on is the issue of the widening income gap in Singapore. In this paper, we would be discussing about how the widening income gap is linked to globalisation and what measures are used to solve it, as well as the impacts and reasons for the manifestation of widening income gap.
Globalization is defined as the free movements of goods, services and capital across borders. It is a contentious process by which the western market economies have effectively spread across the globe. Although it does not constitute a new phenomenon, it is viewed as an inexorable integration of markets, nations and technologies to a degree never witnessed before in a way that is enabling individuals, and corporations to reach around the world further, faster, deeper and more economically than ever before (Heshmati, 2003).
Globalization causes rapid changes in trade relations, financial flows, and mobility of labour across the world. The development has brought the economies of developed countries closer together and more strongly interrelated. However, there is a large heterogeneity in the degree of globalization process over time and across countries and regions. This heterogeneity causes disparity in development and urges the need for research to find sources of disparity and quantification of its magnitude and impacts (Heshmati, 2003).
Many scholars regard globalization as a force which will inevitably bring about the decline (Held, 1995), erosion (Hall, 1991) or the end (Ohmae, 1995) of the nation-state. As the argument goes, the process of globalization in its various manifestations is increasingly undermining the territorial boundedness, sovereignty and traditional role of the existing system of the modern nation-state. With other major countries such as America and India facing the problem of the widening income gap as their countries continue to evolve, one major aim of this paper is to understand the risks of the widening income gap if Singapore ever falls into the trap with the advancement of our country.
WIDENING INCOME GAP
Economic inequality (or “wealth and income differences”) comprises all disparities in the distribution of economic assets and income. Widening income gap refers to the differences of income received by the employees and is a global phenomenon caused by globalisation. Due to globalisation, the elite and higher-educated are coveted for their expertise, hence the demand for these professionals causes their salary to be raised higher. Those at the lower-income group however suffer from globalisation as the jobs available are scarce; hence, their salaries are pushed lower because many people are fighting for the same job. This is called widening income gap.
The Gini coefficient is a standard measure of income inequality. It is given as a means of multiple observations for a given country in a given year. The multiplicity of observations is due to the different definitions of income, area coverage and units of measurement (Heshmati, 2003). The Gini Coefficient ranges between 0, where there is no concentration which is perfect equality, and 1 where there is total concentration which is perfect inequality (Slack and Rodrigue, 1998). Absolute poverty is where people do not have sufficient access to food, shelter, and clothing to provide a basic level of physical and mental development (Duncan, 2000).
National Household Income
In Singapore, the household income from work in 2010 increased due to strong economic growth. Median monthly household income from work in 2010 recovered to above the level before the economic downturn in 2009. Among resident households, median monthly income from work increased by 3.1 per cent from $4,850 in 2009 to $5,000 in 2010 (Table 1); in real terms, the increase was 0.3 per cent (Department of Statistics Singapore, 2010).
Table 1 Monthly Household Income from Work Among Resident Households
Year
Median Household Income
Average Household Income
Dollar
Nominal Change (%)
Real Change (%)
Dollar
Nominal Change (%)
Real Change (%)
2000
3,638
3.9
2.6
4,988
5.7
4.2
2001
3,860
6.1
5.0
5,338
7.0
5.9
2002
3,628
-6.0
-5.6
5,069
-5.0
-4.7
2003
3,601
-0.7
-1.2
5,075
0.1
-0.4
2004
3,689
2.4
0.8
5,194
2.3
0.7
2005
3,860
4.6
4.1
5,447
4.9
4.4
2006
4,000
3.6
2.6
5,715
4.9
3.9
2007
4,375
9.4
7.1
6,295
10.1
7.9
2008
4,946
13.1
6.0
7,086
12.6
5.6
2009
4,850
-1.9
-2.5
6,826
-3.7
-4.2
2010
5,000
3.1
0.3
7,214
5.7
2.8
Source: Department of Statistics Singapore (2011) “Key Household Income Trends, 2010”
Among employedhousehold, with at least one working person, median monthly income from work increased by 5.7 per cent in nominal terms (from $5,400 in 2009 to $5,700 in 2010) and 2.8 per cent in real terms (Table 2).
Table 2 Monthly Household Income from Work Among Employed Households
Year
Median Household Income
Average Household Income
Dollar
Nominal Change (%)
Real Change (%)
Dollar
Nominal Change (%)
Real Change (%)
2000
4,000
5.3
3.9
5,456
7.0
5.6
2001
4,141
3.5
2.5
5,736
5.1
4.1
2002
4,038
-2.5
-2.1
5,572
-2.9
-2.5
2003
4,050
0.3
-0.2
5,618
0.8
0.3
2004
4,106
1.4
-0.3
5,761
2.5
0.9
2005
4,345
5.8
5.3
6,052
5.1
4.6
2006
4,495
3.5
2.5
6,280
3.8
2.8
2007
4,883
8.6
6.4
6,889
9.7
7.4
2008
5,475
12.1
5.2
7,752
12.5
5.5
2009
5,398
-1.4
-2.0
7,549
-2.6
-3.2
2010
5,704
5.7
2.8
8,058
6.7
3.8
Source: Department of Statistics Singapore (2011) “Key Household Income Trends, 2010”
Overall, the monthly household income has increased in Singapore in the year 2010. However, there are differences in the increase between the lower-income families and the higher-income families which cause the widening income gap in Singapore.
Gini Coefficient
The income gap between household incomes from work per household member among employed households increased marginally in 2010. The Gini coefficient, increased slightly in 2010. In particular, including employer CPF contributions5, the Gini coefficient was 0.472 in 2010, compared to 0.471 in 2009 (Figure 1). Adjusting in addition for government benefits and taxes, the Gini coefficient was 0.452 in 2010 (Yeoh, 2007/2008).
Source: Department of Statistics Singapore (2011) “Key Household Income Trends, 2010”
Figure 2 below shows the Gini coefficient5 trend for Singapore from 1974 to 2006.
Figure 2. Singapore Gini Coefficient from 1974 2007
Data from 2000 2007:Department of Statistics Singapore (2008)Source: Data from 1975 1999: Mukhopadhaya, Pundarik (2001)
LINK BETWEEN GLOBALISATION AND WIDENING INCOME GAP
What role has globalisation played in changes in income inequality? Most research on this issue has been concentrated in recent years on the changes in income inequality in the high-income countries. Discussion has mainly focussed on whether the widening wage gap is due to increased imports of labour intensive goods from developing countries (pushing down demand for low-wage labour) or technological change—in particular, improvements in information technology (increasing demand for high-skilled labour relative to demand for low-skilled labour).
But besides these two factors, other factors thought to contribute are: slower growth in the supply of skilled workers (pushing up their wages relative to the wages of less-skilled workers); increased workforce participation of women and increased immigration of low skilled workers (pushing down wages of less-skilled labour); and the waning powers of trade unions (for a survey of the literature, see Tyers, Duncan and Martin 1999).
Economics research generally gives more support to improvements in technology as being most important, and much more important than increased trade with developing countries (see Tyers, Duncan, and Martin 1999). Low and middle income countries account for about 80 per cent of the world’s industrial workforce and manufactures comprise about 60 per cent of their exports (up from 20 per cent in the 1960s).
In line with predictions from economic theory, Williamson (1997) argues that the increased flow of labour-intensive goods and unskilled labour from developing countries to high-income countries in the latter half of the 20th Century reduced demand for lowskilled labour in the high-income countries, increasing income inequality in these countries. He argues that this is consistent with the Heckscher-Ohlin trade model that says that trade will tend to equalise factor payments, leading to greater cross-country income equality for low-skilled labour, increasing income inequality in the high-income countries, and increasing income equality in the lower-income countries. More importantly, he notes that in the earlier golden period of globalisation (1870 to 1913), the growing income inequality in the then higher income countries led to the reversal of globalisation (including restrictions on immigration) and the devastating 1921-38 period.
REASONS FOR WIDENING INCOME GAP
The underlying characteristic for the recent growing disparity is the difference in income growth for the bottom 20% and top 20% households (Yeoh, 2007/2008). Table 3 illustrates the different income growth rates for each income group since 2000.
Table 3. Annual Income Growth for Various Income Groups
Income Groups
Real Annual Change in Average Monthly Household Income per Household Member (%)
2000 2005
2005 2006
2006 2007
Bottom 10%
2.4
6.6
3.3
Bottom 11 20%
0.5
5.2
3.6
Top 11 20%
3.7
5.7
6.0
Top 10%
4.3
8.0
11.1
Source: Department of Statistics Singapore (2008). “Key Household Income Trends 2007.”
Generally, the bottom 20% experienced slower growth rates than the top 20% of income earners during 2000 to 2007. Moreover, the ratio of average income of the top 20% to lowest 20%8 worsened from 9.99 in 2000 to 12.90 in 2007. Hence, these ratios show a widening income disparity between top and bottom income earners. Economists have also noted an understated stagnation of income amongst the middle class – households that form the middle 60% of the income ladder. However, more employed households have moved up the social and financial ladder in 2007 as compared to 2006 (Yeoh, 2007/2008).
There are differences between the different racial groups in Singapore as well. Table 4 below shows the income changes for each racial group in 2000 and 2005.
Table 4. Income of the Major Racial Groups in Singapore
Chinese
Malays
Indians
Others
2000
2005
2000
2005
2000
2005
2000
2005
Average Monthly
Household Income
from Work ($)
5220
5630
3150
3440
4560
5170
7250
7250
Change (%)
7.9%
9.2%
13.4%
17.2%
Source: Department of Statistics Singapore (2006) “General Household Survey 2005 Statistical Release 2: Transport,Overseas Travel, Housing and Household Characteristics”.
As depicted in Table 4, the wage difference between the Malays and other races remain very alarming. From 2000 to 2005, among all the racial groups in Singapore, Malays had the lowest increase in income as compared to other races.
With regard to income disparity between occupations, skilled professionals continue to earn more than unskilled workers, and have extended their lead further since 1996. Figure 3 below shows the ratio of the respective occupations’ wages to the unskilled occupations’ wages.
Hence, this relative stagnation of wage growth amongst the unskilled would certainly have an effect on the widening income disparity between the two ends of the occupational spectrum as shown in Figure 3.
IMPACTS OF WIDENING INCOME GAP
Singaporeans are mainly concerned about the inflation which has raised about 3%-4% this year (Channelnews 17 February 2011) and skyrocketed housing prices in Singapore. Thus, many Singaporeans are unable to retire as they do not have the financial stability to sustain the high cost of living without being employed. According to the survey carried out by The Straits Times, this is the income gap situation: The average incomes of the top 20 per cent of households rose by 53 per cent – from $12,091 to $18,472 – from 1997/98 to 2007/08. By comparison, the average incomes of the poorest 20 per cent of households were kept down as a result of globalization, competition from emerging economies and new technology. They fell by 2.7 per cent over the same period – from $1,309 to $1,274.
The living conditions of the lower income households in Singapore will cause them to lose enthusiasm and motivation for work, thus the productivity will decrease and in turn lead to stagnation of the economy. In the short run, the large proportion of the poor and their lower marginal propensity to consume will lead to a lower injection multiplier and possible slower growth. In the long run, if the widening income gap in Singapore is done put to a stop, many people will fall into the poverty trap. As George Orwell laments, “Being poor isn’t about not having anything today, it is about knowing you’ll have nothing tomorrow.” Inequality and injustice in the society will also make people gradually lose national cohesion, and hence menace to act as a centrifugal force that tears the social fabric of our nation apart. The long-term stability of Singapore’s society will be severely disturbed.
The widening income gap is inclined to inflict social cohesion and undermine trust in the society. At the same time, it will impair social capital thus compromise the stability of the society. Uslaner

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