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mination 19 EARNINGS AND DISCRIMINATION WHAT’S NEW IN THE SEVENTH EDITION:
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LEARNING OBJECTIVES:
By the end of this chapter, students should understand:
??how wages compensate for differences in job characteristics.
??the human-capital and signaling theories of education.
??why a few superstars earn tremendous incomes in some occupations.
??why wages rise above the level that balances supply and demand.
??why it is difficult to measure the impact of discrimination on wages.
??when market forces can and cannot provide a natural remedy for discrimination.
LEARNING OBJECTIVES:
Chapter 19 is the second chapter in a three-chapter sequence that addresses the economics of labor markets. Chapter 18 developed the markets for the factors of production. Chapter 19 goes beyond the supply-and-demand models developed in Chapter 18 to help explain the wide variation in wages we find in the economy. Chapter 20 addresses the distribution of income and the role the government can play in altering the distribution of income.
The purpose of Chapter 19 is to extend the basic neoclassical theory of the labor market that was developed in Chapter 18. Neoclassical theory argues that wages depend on the supply and demand for labor and that labor demand depends on the value of the marginal productivity of labor. To address the wide variation in the wages that occurs in the real world, it is important to examine more precisely what determines the supply and demand for various types of labor. 340
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Chapter 19/Earnings and Discrimination ? 341
KEY POINTS:
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Workers earn different wages for many reasons. To some extent, wage differentials compensate workers for job attributes. Other things equal, workers in hard, unpleasant jobs are paid more than workers in easy, pleasant jobs.
Workers with more human capital get paid more than workers with less human capital. The return to accumulating human capital is high and has increased over the past several decades.
Although years of education, experience, and job characteristics affect earnings as theory predicts, there is much variation in earnings that cannot be explained by things that economists can measure. The unexplained variation in earnings is largely attributable to natural ability, effort, and chance. Some economists have suggested that more educated workers earn higher wages not because
education raises productivity but because workers with high natural ability use education as a way to signal their high ability to employers. If this signaling theory were correct, then increasing the educational attainment of all workers would not raise the overall level of wages.
Wages are sometimes pushed above the level that brings supply and demand into balance. Three reasons for above-equilibrium wages are minimum-wage laws, unions, and efficiency wages. Some differences in earnings are attributable to discrimination on the basis of race, sex, or other factors. Measuring the amount of discrimination is difficult, however, because one must correct for differences in human capital and job characteristics.
Competitive markets tend to limit the impact of discrimination on wages. If the wages of a group of workers are lower than those of another group for reasons not related to marginal productivity, then nondiscriminatory firms will be more profitable than discriminatory firms. Profit-maximizing behavior, therefore, can reduce discriminatory wage differentials. Discrimination persists in competitive markets, however, if customers are willing to pay more to discriminatory firms or if the government passes laws requiring firms to discriminate.
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CHAPTER OUTLINE:
I. Some Determinants of Equilibrium Wages Most people (especially college students) have little idea about the level of earnings in the labor force and about the extent of income differences. The general impression is that earnings are higher than they actually are. Thus, the actual differences in earnings among the population are a topic that most students will find interesting. A. Compensating Differentials
1. Definition of compensating differential: a difference in wages that arises to offset the nonmonetary characteristics of different jobs.
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342 ? Chapter 19/Earnings and Discrimination
2. Jobs that are easy, fun, or safe will pay lower wages than jobs that are difficult, dull, or
dangerous. An obvious example of a compensating wage differential is work that entails danger and potential personal injury. A wage premium is paid to compensate workers for exposing themselves to risk. Examples include workers in high-rise construction or electrical linemen. B. Human Capital
1. Definition of human capital: the accumulation of investments in people, such as education and on-the-job training.
2. Workers with more human capital earn more on average than those with less human capital. 3. Firms are willing to pay more for highly educated workers because highly educated workers
have higher marginal products. 4. Case Study: The Increasing Value of Skills
a. Table 1 compares the average earnings of college graduates with the average earnings
of high school graduates with no additional education.
Table 1 b. We can see that there has been an increase in this difference over time.
c. One possible reason that this has occurred is that international trade has changed the
relative demand for skilled and unskilled labor.
d. Another possible reason is that changes in technology have changed the relative demand
for skilled and unskilled workers.
5. In the News: Higher Education as an Investment
a. In light of increasing costs of attending college, some people question the returns to
college attendance relative to other investments.
b. This article from The Hamilton Project at The Brooking Institution confirms the value of
attending college.
C. Ability, Effort, and Chance
1. Because of heredity and upbringing, people differ in their physical and mental attributes. This
will affect their productivity level and therefore their wage. 2. People also differ in their level of effort. Those who work hard are more productive and earn
a higher wage. 3. Chance also plays a role in determining wages. 4. Case Study: The Benefits of Beauty
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