This chapter summarizes the most important findings derived in the various parts of this book, discusses their interrelations, and explores their policy implications.
In discussing differentials in wages in the LAFTA region, an aspect of the problem of total income differences is being touched upon. Differences in total income tend to reflect inequalities in the income received from labor because labor income usually constitutes well over half of total income. Thus, labor income differentials can provide an indication of total income differences.
Wage differentials have diverse origins. They can arise from differences in the country or region of residence, in skills, and in industry and firm of employment.1 Behind these factors lie the real causes of variation in labor income. They include short-run disequilibrium situations, unattractiveness or disutility of the job to the worker, labor productivity, training and moving costs and other labor supply conditions, and imperfections in the labor and product markets.
Some of these causes are impervious to labor policy--short-run disequilibria, for example, and the compensating wage differentials reflecting how workers perceive the relative disutilities of performing certain tasks. It would be practically impossible to eliminate these sources of wage differentials or labor income inequality. Others are more tractable, but may require a judgment of their importance as sources of income inequality, on the one hand, and as signalling devices for market adjustments, on the other. This is so when wage differentials mainly arising from labor productivity, for instance, may act as the mechanisms through which the labor supply structure adjusts to the corresponding structure of labor demand. If adjustments take place in this fashion, the differences found in labor incomes may at least be partly justified. However, some of these productivity differences may be so ingrained that they will never tend to correct themselves, in which case the policy maker may be justified in trying to ameliorate the resulting wage differentials to reduce inequality.
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