Earnings and
Discrimination
Chapter 19
Differences in Earnings
in the U.S,Today
The typical physician earns about $200,000
a year.
The typical police officer earns about
$50,000 a year.
The typical farm worker earns about
$20,000 a year.
What causes earnings
to vary so much?
Wages are governed by labor supply and
labor demand.
Labor demand reflects the marginal
productivity of labor.
In equilibrium,each worker is paid the
value of his or her marginal contribution
to the economy’s production of goods and
services.
Some Determinants
of Equilibrium Wages
Compensating differentials
Human capital
Ability,effort,and chance
Signaling
The superstar phenomenon
Compensating Differentials
Compensating differentials refer to
differences in wages that arises from
nonmonetary characteristics of different
jobs,
Coal miners are paid more than others
with similar levels of education.
Night shift workers are paid more than
day shift workers.
Professors are paid less than lawyers and
doctors.
Human Capital
Human capital is the accumulation of
investments in people,
The most important type of human capital
is education.
Education represents an expenditure of
resources at one point in time to raise
productivity in the future.
College graduates in the U.S,earn almost
twice as much as workers with a high
school diploma.
Average Annual earnings by
Educational Attainment
1980 2000
Men
High school,no college $36,430 $36,770
College graduates $52,492 $69,421
Percent extra for college grads +44% +89%
Women
High school,no college $21,969 $24,970
College graduates $29,663 $42,575
Percent extra for college grads +35% +70%
Why has the gap in earnings between skilled
and unskilled workers risen in recent years?
International trade has altered the relative
demand for skilled and unskilled labor.
Changes in technology have altered the
relative demand for skilled and unskilled
labor.
Ability,Effort,and Chance
An Alternative View
of Education,Signaling
Firms use educational attainment as a way
of sorting between high-ability and low-
ability workers.
It is rational for firms to interpret a college
degree as a signal of ability.
The Superstar Phenomenon
Superstars arise in markets that exhibit the
following characteristics:
Every customer in the market wants to
enjoy the good supplied by the best
producer.
The good is produced with a technology
that makes it possible for the best
producer to supply every customer at a
low cost.
Above-Equilibrium Wages
Minimum-wage laws
Market power of labor unions
Efficiency wages
Efficiency Wages
The theory of efficiency wages holds that a
firm can find it profitable to pay high
wages because doing so increases the
productivity of its workers,High wages
may:
reduce worker turnover.
increase worker effort.
raise the quality of workers that apply for
jobs at the firm.
The Economics of Discrimination
Discrimination occurs when the
marketplace offers different opportunities
to similar individuals who differ only by
race,ethnic group,sex,age,or other
personal characteristics.
Although discrimination is an emotionally
charged topic,economists try to study the
topic objectively in order to separate myth
from reality.
Measuring Labor-Market
Discrimination
Discrimination is often measured by
looking at the average wages of different
groups.
Even in a labor market free of
discrimination,different people have
different wages.
People differ in the amount of human
capital they have and in the kinds of work
they are willing and able to do.
Measuring Labor-Market
Discrimination
Simply observing differences in wages
among broad groups – white and black,
men and women – says little about the
prevalence of discrimination.
Because the differences in average wages
among groups in part reflect differences in
human capital and job characteristics,they
do not by themselves say anything about
how much discrimination there is in the
labor market.
Economic Forces and
Discrimination
Firms that do not discriminate will have
lower labor costs when they hire the
employees discriminated against.
Nondiscriminatory firms will tend to
replace firms that discriminate.
Competitive markets tend to limit the
impact of discrimination on wages.
Firms that do not discriminate will be
more profitable than those firms that do
discriminate.
Discrimination by Customers
and Governments
Although the profit motive is a strong
force acting to eliminate discriminatory
wage differentials,there are limits to its
corrective abilities.
Customer preferences
Government policies
Customer preferences
Customer preferences,If customers have
discriminatory preferences,a competitive
market is consistent with a discriminatory
wage differential,This will happen when
customers are willing to pay to maintain
the discriminatory practice.
Government policies
Government policies,When the
government mandates discriminatory
practices or requires firms to discriminate,
this may also lead to discriminatory wage
differentials.
Summary
Workers earn different wages for many
reasons.
To some extent,wage differentials
compensate workers for job attributes.
Workers with more human capital get
paid more than workers with less human
capital.
Summary
The return to accumulating human capital
is high and has increased over the past
decade.
There is much variation in earnings that
cannot be explained by things economists
can measure.
Summary
The unexplained variation in earnings is
largely attributable to natural ability,
effort,and chance.
Some economists argue that more-
educated workers earn higher wages
because workers with high natural ability
use education as a way to signal their high
ability to employers.
Summary
Wages are sometimes pushed above the
equilibrium level because of minimum-
wage laws,unions,and efficiency wages.
Some differences in earnings are
attributable to discrimination on the basis
of race,sex,or other factors.
When measuring the amount of
discrimination,one must correct for
differences in human capital and job
characteristics.
Summary
Competitive markets tend to limit the
impact of discrimination on wages.
Discrimination can persist in competitive
markets if customers are willing to pay
more to discriminatory firms,or if the
government passes laws requiring firms to
discriminate.
Discrimination
Chapter 19
Differences in Earnings
in the U.S,Today
The typical physician earns about $200,000
a year.
The typical police officer earns about
$50,000 a year.
The typical farm worker earns about
$20,000 a year.
What causes earnings
to vary so much?
Wages are governed by labor supply and
labor demand.
Labor demand reflects the marginal
productivity of labor.
In equilibrium,each worker is paid the
value of his or her marginal contribution
to the economy’s production of goods and
services.
Some Determinants
of Equilibrium Wages
Compensating differentials
Human capital
Ability,effort,and chance
Signaling
The superstar phenomenon
Compensating Differentials
Compensating differentials refer to
differences in wages that arises from
nonmonetary characteristics of different
jobs,
Coal miners are paid more than others
with similar levels of education.
Night shift workers are paid more than
day shift workers.
Professors are paid less than lawyers and
doctors.
Human Capital
Human capital is the accumulation of
investments in people,
The most important type of human capital
is education.
Education represents an expenditure of
resources at one point in time to raise
productivity in the future.
College graduates in the U.S,earn almost
twice as much as workers with a high
school diploma.
Average Annual earnings by
Educational Attainment
1980 2000
Men
High school,no college $36,430 $36,770
College graduates $52,492 $69,421
Percent extra for college grads +44% +89%
Women
High school,no college $21,969 $24,970
College graduates $29,663 $42,575
Percent extra for college grads +35% +70%
Why has the gap in earnings between skilled
and unskilled workers risen in recent years?
International trade has altered the relative
demand for skilled and unskilled labor.
Changes in technology have altered the
relative demand for skilled and unskilled
labor.
Ability,Effort,and Chance
An Alternative View
of Education,Signaling
Firms use educational attainment as a way
of sorting between high-ability and low-
ability workers.
It is rational for firms to interpret a college
degree as a signal of ability.
The Superstar Phenomenon
Superstars arise in markets that exhibit the
following characteristics:
Every customer in the market wants to
enjoy the good supplied by the best
producer.
The good is produced with a technology
that makes it possible for the best
producer to supply every customer at a
low cost.
Above-Equilibrium Wages
Minimum-wage laws
Market power of labor unions
Efficiency wages
Efficiency Wages
The theory of efficiency wages holds that a
firm can find it profitable to pay high
wages because doing so increases the
productivity of its workers,High wages
may:
reduce worker turnover.
increase worker effort.
raise the quality of workers that apply for
jobs at the firm.
The Economics of Discrimination
Discrimination occurs when the
marketplace offers different opportunities
to similar individuals who differ only by
race,ethnic group,sex,age,or other
personal characteristics.
Although discrimination is an emotionally
charged topic,economists try to study the
topic objectively in order to separate myth
from reality.
Measuring Labor-Market
Discrimination
Discrimination is often measured by
looking at the average wages of different
groups.
Even in a labor market free of
discrimination,different people have
different wages.
People differ in the amount of human
capital they have and in the kinds of work
they are willing and able to do.
Measuring Labor-Market
Discrimination
Simply observing differences in wages
among broad groups – white and black,
men and women – says little about the
prevalence of discrimination.
Because the differences in average wages
among groups in part reflect differences in
human capital and job characteristics,they
do not by themselves say anything about
how much discrimination there is in the
labor market.
Economic Forces and
Discrimination
Firms that do not discriminate will have
lower labor costs when they hire the
employees discriminated against.
Nondiscriminatory firms will tend to
replace firms that discriminate.
Competitive markets tend to limit the
impact of discrimination on wages.
Firms that do not discriminate will be
more profitable than those firms that do
discriminate.
Discrimination by Customers
and Governments
Although the profit motive is a strong
force acting to eliminate discriminatory
wage differentials,there are limits to its
corrective abilities.
Customer preferences
Government policies
Customer preferences
Customer preferences,If customers have
discriminatory preferences,a competitive
market is consistent with a discriminatory
wage differential,This will happen when
customers are willing to pay to maintain
the discriminatory practice.
Government policies
Government policies,When the
government mandates discriminatory
practices or requires firms to discriminate,
this may also lead to discriminatory wage
differentials.
Summary
Workers earn different wages for many
reasons.
To some extent,wage differentials
compensate workers for job attributes.
Workers with more human capital get
paid more than workers with less human
capital.
Summary
The return to accumulating human capital
is high and has increased over the past
decade.
There is much variation in earnings that
cannot be explained by things economists
can measure.
Summary
The unexplained variation in earnings is
largely attributable to natural ability,
effort,and chance.
Some economists argue that more-
educated workers earn higher wages
because workers with high natural ability
use education as a way to signal their high
ability to employers.
Summary
Wages are sometimes pushed above the
equilibrium level because of minimum-
wage laws,unions,and efficiency wages.
Some differences in earnings are
attributable to discrimination on the basis
of race,sex,or other factors.
When measuring the amount of
discrimination,one must correct for
differences in human capital and job
characteristics.
Summary
Competitive markets tend to limit the
impact of discrimination on wages.
Discrimination can persist in competitive
markets if customers are willing to pay
more to discriminatory firms,or if the
government passes laws requiring firms to
discriminate.
