EARNINGS AND DISCRIMINATION

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EARNINGS AND DISCRIMINATION

• Chapter 19

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Differences in Earnings in 1994

• The average baseball player earned 1,200,000.
• The average physician earned 177,000.
• The average factory worker earned 22,000.

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What causes earnings to vary so much?

• Wages are governed by labor supply and labor
  demand.
• Labor demand reflects the marginal productivity
  of labor.

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What causes earnings to vary so much?

• In equilibrium, each worker is paid the value of
  his or her marginal contribution to the
  production of goods and services.

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Some Determinants of Equilibrium Wages

• Compensating differentials
• Human capital
• Ability, effort, and chance
• Signaling
• The superstar phenomenon

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Compensating Differentials

• Compensating differentials refer to differences
  in wages that arises from nonmonetary
  characteristics of different jobs.
• ä Coal miners are paid more than others with
  similar levels of education.
• ä Night shift workers are paid more than day
  shift workers.

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Human Capital

• Human capital is the accumulation of investments
  in people.
• The most important type of human capital is
  education.

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Human Capital

• Education represents an expenditure of resources
  at one point in time to raise productivity in the
  future.

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Human Capital

• College graduates in the U.S. earn about 65
  percent more than workers with a high school
  diploma.

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The Ratio of Earnings of College Graduates to
High School Graduates
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The Ratio of Earnings of College Graduates to
High School Graduates
2.00
1.75
1.50
0
1975
1980
1985
1990
1995
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The Ratio of Earnings of College Graduates to
High School Graduates
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Ability, Effort, and Chance

• Ability Because of heredity and upbringing,
  people differ in their physical and mental
  attributes.

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Ability, Effort, and Chance

• Effort Some people work hard, others are
  lazythose that work hard are more productive and
  earn more.

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Ability, Effort, and Chance

• Chance Being in the right place at the right
  time learning the right skills.

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Signaling An Alternative View of Education

• Firms use educational attainment as a way of
  sorting between high-ability and low-ability
  workers.
• ä It is rational for firms to interpret a
  college degree as a signal of ability.

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The Superstar Phenomenon

• Superstars arise in markets that exhibit the
  following characteristics
• ä Every customer wants to enjoy the good
  supplied by the best producer.
• ä The good is produced with a technology that
  makes it possible for the best producer to
  supply every customer at a low cost.

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Quick Quiz!

• Define compensating differential and give an
  example.

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Quick Quiz!

• Give two reasons why more-educated workers earn
  more than less-educated workers.

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The Economics of Discrimination

• Discrimination is another source of wage
  differences.
• ä Discrimination occurs when the marketplace
  offers different opportunities to similar
  individuals who differ only by race, ethnic
  group, sex, age, or other personal
  characteristics.

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The Economics of Discrimination

• The differences in earnings caused by
  discrimination are viewed as unjust and socially
  unacceptable.

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Measuring Labor-Market Discrimination

• How much does discrimination in labor markets
  affect the earnings of different groups of
  workers?

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Measuring Labor-Market Discrimination

• Discrimination is often measured by looking at
  the average wages of different groups.

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Measuring Labor-Market Discrimination

• Even in a labor market free of discrimination,
  different people have different wages.

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Measuring Labor-Market Discrimination

• Some differences in earnings are attributable to
  discrimination on the basis of race, sex, or
  other factors.

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Measuring Labor-Market Discrimination

• Measuring the amount of discrimination is
  difficult because some difference in wages is due
  to differences in education and job
  characteristics.

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Economic Forces and Discrimination

• Competitive markets tend to limit the impact of
  discrimination on wages.
• Nondiscriminatory firms will be more profitable
  than discriminatory firms.

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Economic Forces and Discrimination

• Firms that do not discriminate will have lower
  labor costs when they hire the employees
  discriminated against.

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Economic Forces and Discrimination

• Nondiscriminatory firms will tend to replace
  firms that discriminate.

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Discrimination by Customers and Governments

• Discrimination can persist in competitive markets
  under the following conditions
• ä When customers are willing to pay to
  maintain the discriminatory practice.
• ä When the government requires firms to
  discriminate.

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The Debate Over Comparable Worth

• According to the doctrine of comparable worth,
  jobs deemed comparable should be paid the same
  wage.

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The Debate Over Comparable Worth

• Advocates of comparable worth want jobs to be
  rated according to a set of impartial criteria
  such as education, experience, and so on.

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The Debate Over Comparable Worth

• Critics of comparable worth argue that a
  competitive market is the best mechanism for
  setting wages.

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Quick Quiz!

• Why is it hard to establish whether a group of
  workers is being discriminated against?

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Quick Quiz!

• Explain how profit-maximizing firms tend to
  eliminate discriminatory wage differentials.

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Quick Quiz!

• How might a discriminatory wage differential
  persist?

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Conclusion

• In competitive markets there are many things that
  affect the value of the marginal product of
  labor.
• The theory of wage determination simply explains
  why some workers earn higher wages than other
  workers.

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EARNINGS AND DISCRIMINATION

• End of Chapter 19

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Figure 19-1