Income, Wealth & Labor Market Dynamics: A Comprehensive Overview

Income and Wealth

Income

Total income received by owners of factors of production.

Income Distribution

How income is distributed among owners of factors of production as wages, land rents, interest, and profits. Depends on two factors:

• Wage differences (if they are small, income distribution is relatively equal)
• Wealth distribution (some countries have broad access to wealth but large income differences)

Wealth

Net asset value of tangible, physical, and financial assets.

Labor Market Dynamics

Labor Demand

Depends on wages, productivity, and prices of goods produced.

Individual Labor Supply

Shows the number of hours an individual is willing to work at a given wage.

Labor supply depends on:

• Wages
• Population
• Labor force participation rate

Aggregate Labor Supply

Represents the total number of people willing to work at each price level. The aggregate labor supply curve tends to be inelastic (vertical) and responds minimally to wage changes.

Labor Market Equilibrium

Labor supply and demand determine labor market equilibrium. Unemployment arises when this equilibrium is not reached.

Labor Market Imbalances

Explained by market imperfections (companies and unions with market power), rigidities (companies not fully controlling employee work hours), and government interventions (labor laws).

Wage Differentials

Originate from differences in education, work experience (human capital), and job characteristics.

Human Capital

Investment in people, primarily through education and on-the-job training.

Compensating Differentials

Wage differences that offset non-monetary characteristics of different jobs.

Financial Capital

Definition and Role

Enables the acquisition of physical capital. Investment and the cost of capital are determined in financial markets.

Interest

Payment for the services of capital, or the price of a loan.

Interest rates depend on:

• Risk of the transaction
• Collateral
• Loan duration