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74 ❖ Chapter 19/Earnings and Discrimination
105. White women earn an average of 24% less than white men. A labor economist who wants to inves-
tigate whether the differences in earnings indicate labor-market discrimination against women
should consider whether white men and women have similar
(i)
years of work experience.
(ii)
educational attainments.
(iii)
occupations.
(iv)
child care responsibilities.
a.
(i) and (ii) only
b.
(iii) and (iv) only
c.
(ii) only
d.
(i), (ii), (iii), and (iv)
106. Black men earn an average of 21% less than white men. A labor economist who wants to investi-
gate whether the differences in earnings indicate labor-market discrimination against black men
should consider whether black and white men have similar
(i)
years of work experience.
(ii)
years of education.
(iii)
occupations.
(iv)
quality of education.
a.
(i) and (ii) only
b.
(iii) and (iv) only
c.
(ii) only
d.
(i), (ii), (iii), and (iv)
107. Which of the following is not correct?
a.
Some economists believe that business owners who emphasize profit maximization will
hire the most productive workers regardless of the personal characteristics of the worker;
hence, these firms will drive discriminating firms out of business.
b.
Two economists found that employers in Boston and Chicago were about 50 percent more
likely to interview job applicants named Emily and Greg than those named Lakisha and
Jamal.
c.
Two economists found that women were less likely to participate in an experiment where
they were paid based on math skills but more likely to participate when they were paid
based on reading skills; men were more likely to participate when they were paid based on
math skills and less likely to participate when they were paid based on reading skills.
d.
Economists found that the prices of older baseball cards were about 10 percent lower
when the player was black rather than white.
Chapter 19/Earnings and Discrimination ❖ 75
108. Why do economists study sports teams when looking for evidence of labor-market discrimination?
a.
because the salaries paid to professional athletes exhibit the superstar phenomenon, which
is highly correlated with discrimination
b.
because all four United States professional sports leagues (football, basketball, hockey,
and baseball) require discrimination studies every five years
c.
because nonwhites comprise a majority of starters for many professional sports teams
d.
because the wide availability of performance statistics allows economists to control for
individual player productivity in ways that are difficult to do for other types of firms
109. Which of the following statements is not correct?
a.
Competitive markets tend to limit the impact of discrimination on wages.
b.
Differences in earnings of whites and blacks or men and women provide clear evidence of
discrimination.
c.
Some differences in earnings are attributable to discrimination based on race, sex, or other
factors.
d.
Profit-maximizing behavior can reduce discriminatory wage differentials.
110. Which of the following factors affects the marginal productivity of a worker?
a.
human capital
b.
the worker’s disposable income
c.
compensating wage differentials
d.
discrimination based on age, race, or gender
111. As a result of their experiment economists Muriel Niederle and Lise Vesterlund found that
a.
women choose competitive environments more than men.
b.
women and men choose competitive environments equally.
c.
women choose competitive environments less than men.
d.
women are just as likely as men to have high-paying corporate jobs.
112. In the experiment conducted by economists Muriel Niederle and Lise Vesterlund
a.
men were better at adding than women.
b.
women chose the tournament payoff scheme more than men.
c.
men thought they won the four-player tournament part of the experiment more often than
women thought they won the four-player tournament.
d.
the researchers demonstrated that women face significant wage discrimination in stock
brokerages.
76 ❖ Chapter 19/Earnings and Discrimination
113. The competition experiment conducted by economists Muriel Niederle and Lise Vesterlund was
consistent with the results of Terry Odean which were that
a.
men were better at math than women.
b.
men chose competition more because they were better at sports than women.
c.
men trade stocks excessively while women adopt a buy-and-hold strategy.
d.
streetcar companies were not in favor of segregation because it hurt their profits.
TRUE/FALSE
1. The economic theory of labor markets suggests that wages are determined by labor supply and labor
demand.
2. A compensating differential refers to a difference in wages that arises from nonmonetary character-
istics.
3. A compensating differential is a difference in wages due to higher levels of education or other forms
of human capital.
4. The fact that doctors are paid more than economics professors is an example of a compensating dif-
ferential.
5. Traci is a nurse, and she gets paid an additional $1.00 per hour for agreeing to work the night shift.
Carol is also a nurse, but she works the day shift and does not get paid this extra dollar per hour.
This difference in pay is an example of a compensating differential.
6. Daryn earns a higher salary than his friend Nick because Daryn is willing to work on the loading
dock, whereas Nick prefers to work in an air-conditioned office. The difference in salary could il-
lustrate a compensating differential.
Chapter 19/Earnings and Discrimination ❖ 77
7. Compensating differentials are differences in wages related to the characteristics of a job.
8. A computer is an example of human capital.
9. Higher levels of human capital are correlated with higher earnings because firms are willing to pay
more for better-educated workers who have higher marginal productivities.
10. Education and on-the-job training are sources of human capital.
11. The human-capital theory of education maintains that workers who complete specific levels of edu-
cation enhance their productivity through education.
12. Human capital refers to the physical tools and equipment that workers use on their jobs to enhance
their productivity.
13. John has financial assets totaling $1.5 million, and he plans to use these assets to start his own busi-
ness. Since John owns these funds and will not need to borrow to start his business, these assets are
considered human capital.
14. As a result of an increase in the earnings gap between skilled and unskilled jobs, the incentive to get
a college education has been declining.
15. The rising gap in wages between unskilled and skilled workers is most likely related to a larger in-
crease in demand for unskilled occupations relative to skilled occupations.
78 ❖ Chapter 19/Earnings and Discrimination
16. One hypothesis to explain the rising gap in wages between unskilled and skilled workers in the
United States is that international trade has altered the relative demands for skilled and unskilled
workers.
17. Over the past 30 years, the number of jobs in the United States requiring skilled labor has been de-
clining as foreign countries steal these jobs away from the U.S. As a result, the domestic demand
for skilled labor has been falling and the wage gap between skilled and unskilled labor has been nar-
rowing.
18. The statement that "the rich get richer, and the poor get poorer" is supported by evidence of an ex-
panding wage gap between high-skill and low-skill workers.
19. Some economists suggest that international trade has led to an expanding wage gap between high-
skill and low-skill workers in the United States.
20. It is increasingly clear that technological change is the only explanation for an expanding wage gap
between high-skill and low-skill workers.
21. Empirical evidence suggests that ability, effort, and chance are not likely to be significant contribu-
tors to wage differences.
22. Since measurable factors such as years of experience and years of education do not explain a large
portion of the variation in wages, ability, effort, and chance must play a significant role in determin-
ing wages.
23. Sometimes workers earn higher wages through chance.
Chapter 19/Earnings and Discrimination ❖ 79
24. One reason why better-looking workers may have higher earnings is that physical attractiveness may
enhance a worker’s productivity for certain jobs, especially for those workers who deal with the
public.
25. One reason why better-looking workers may have higher earnings is that physical attractiveness is
correlated with intelligence.
26. The signaling theory of education maintains that workers who complete specific levels of education
signal their high productivity to potential to employers.
27. The signaling theory of education maintains that workers who complete specific levels of education
enhance their productivity through education.
28. The signaling theory of education suggests that when people earn a college degree they do not be-
come more productive, but they do signal their high ability to prospective employers.
29. A manager of a small firm who believes in the signaling theory of education would encourage her
employees to obtain additional education to raise their on-the-job productivity.
30. The superstar phenomenon explains why professional athletes earn more than amateur athletes.
31. Superstars earn high incomes due to their ability to satisfy the demands of millions of people at
once.
32. An effective minimum wage law will increase the quantity of labor demanded.
80 ❖ Chapter 19/Earnings and Discrimination
33. Labor unions will raise the quantity of labor demanded.
34. Daryn and Nick work for two different companies, but each performs the same job working on a
loading dock. Daryn, however, earns a higher salary than his friend Nick The difference in salary
could illustrate union wages if Daryn’s annual salary is covered by a collective bargaining agree-
ment and Nick’s is not.
35. Efficiency wages will raise the quantity of labor supplied to the market.
36. It is likely that efficiency wages will decrease employee effort.
37. Efficiency wages may decrease employee turnover.
38. Discrimination is a reflection of some people's prejudice against certain groups in society.
39. Discrimination is an emotionally charged issue that is impossible to study objectively.
40. Labor-market discrimination based solely on age is illegal in the United States.
41. It is illegal in the United States for firms to pay different employees different wages for doing the
same job.
42. Evidence of discrimination is most apparent when one compares wages among broad groups.
Chapter 19/Earnings and Discrimination ❖ 81
43. When comparing average wages for black and white men in the United States, wages paid to black
men have been about 20 percent less than those paid to white men.
44. When comparing average wages for male and female workers in the United States, wages paid to
females have been about 40 percent less than those paid to male workers.
45. Politicians often point to wage differentials as evidence of labor-market discrimination against eth-
nic minorities and women; however, economists argue against this approach because people differ in
the kinds of work they are willing and able to do.
46. If an older worker earns less than a younger worker for the same job, we have proof of age discrimi-
nation.
47. If people with blue eyes earn more than people with brown eyes, we have proof of discrimination
against people with brown eyes.
48. Economists would argue that the gender wage gap is narrowing because of efficiency wages.
49. Differences in human capital among groups of workers is possibly a reflection of past discrimina-
tion.
50. Differences in human capital among workers can often be attributed to social or political processes
rather than economic processes.
82 ❖ Chapter 19/Earnings and Discrimination
51. All differences in wages that are not accounted for by differences in human-capital investment are
likely to be a result of discrimination.
52. In a labor market free from discrimination, wages for workers that are employed by the same com-
pany will still differ.
53. One example of labor-market discrimination is that firms may be less likely to interview job-market
candidates whose names suggest that they are members of a racial minority.
54. Discrimination is usually not a profit-maximizing strategy.
55. When discrimination occurs as a result of prejudice, firms do not maximize profits.
56. Profit-maximizing, competitive firms will not discriminate in the hiring of workers unless consum-
ers exercise a preference for discrimination in product markets or governments mandate discrimina-
tion.
57. Streetcar owners in the early 20th century were against segregation for profit maximizing reasons.
58. According to economic historians, streetcars in southern cities in the early 1900s were racially seg-
regated because the owners of the firms believed that segregation raised the firms’ profits.
59. Experimental evidence indicates women choose less competitive environments than men.
Chapter 19/Earnings and Discrimination ❖ 83
60. Customer discrimination is illegal in the United States.
61. Consumers are often a primary source of discrimination in labor markets.
SHORT ANSWER
1. A recent study of the determinants of wages for clerical staff at a state university found that years of
schooling, years of experience, age and job characteristics only explained about one-half of the dif-
ference in wages. Describe other factors that may be important in explaining wages differences for
clerical staff.
2. After graduating from college, you receive job offers from five different accounting firms. All job
offers have a different compensation package. Is it irrational for you to accept an offer that doesn't
provide the highest level of monetary compensation? Use the concept of compensating differentials
to explain your answer.
3. The National Collegiate Athletic Association (NCAA) has long argued that nationally-prominent
college athletes are compensated with an investment in human capital that far exceeds the monetary
reward of playing professional sports. Examine this argument in light of your knowledge of human
capital theory and the economic theory of labor markets.
4. Explain the theory that education acts as a signaling device. How does this contrast with the theory
of education as an investment in human capital?
84 ❖ Chapter 19/Earnings and Discrimination
5. List the productivity factors that may explain the differences in pay between men and women in
similar occupations. Do any of these factors arise as a result of cultural or social traditions? If so,
describe how changes in social relationships will affect the pay gap over time.
6. Explain the role of job experience in explaining the differences between the average wages of men
and women.
7. Explain how compensating differentials could contribute to differences between the average wages
of men and women.
8. Evaluate the following statement: "The gender pay gap provides evidence of widespread, severe, on-
going discrimination by employers and fellow workers."
Chapter 19/Earnings and Discrimination ❖ 85
9. In a recent U.S. presidential campaign, a lobbyist for a prominent national women's organization
made the claim that women in the United States earn $0.60 for every $1.00 earned by a man. A re-
porter, who was prepared for this statement, asked the lobbyist why wages paid to the organization's
secretarial staff (all of whom were women) were significantly below the national average if they
were truly interested in raising the rates of compensation for women. If you were the lobbyist, how
would you have answered this question? Do you think your answer is convincing? Explain.
10. Explain the role that consumers play in perpetuating discrimination in labor markets.
11. Explain why the following situation is likely to persist: soccer players in Europe are the highest paid
athletes and in the US they are among the lowest paid athletes.
