340
mination
WHAT’S NEW IN THE SEVENTH EDITION:
There is a new
In the News
feature on “Higher Education as an Investment” and values and tables have
been updated.
LEARNING OBJECTIVES:
By the end of this chapter, students should understand:
the human-capital and signaling theories of education.
why a few superstars earn tremendous incomes in some occupations.
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:
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
EARNINGS AND
DISCRIMINATION
19
Chapter 19/Earnings and Discrimination ❖ 341
KEY POINTS:
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.
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.
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
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
passes laws requiring firms to discriminate.
CHAPTER OUTLINE:
I. Some Determinants of Equilibrium Wages
A. Compensating Differentials
1. Definition of compensating differential: a difference in wages that arises to offset
the nonmonetary characteristics of different jobs.
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.
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.
B. Human Capital
1. Definition of human capital: the accumulation of investments in people, such as
education and on-the-job training.
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
c. One possible reason that this has occurred is that international trade has changed the
relative demand for skilled and unskilled labor.
for skilled and unskilled workers.
5.
In the News: Higher Education as an Investment
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
2. People also differ in their level of effort. Those who work hard are more productive and earn
a higher wage.
4.
Case Study: The Benefits of Beauty
Table 1
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.
Chapter 19/Earnings and Discrimination ❖ 343
b. They found that people who are considered to be more attractive than average earned
5% more than people of average looks. People of average looks earn 5% to 10% more
c. One possible reason for this is that good looks are important for workers who have close
dealings with the public.
e. A third possible reason for this difference in the wages is discrimination.
D. An Alternative View of Education: Signaling
1. Some economists have suggested that firms may use education as a way to sort high-ability
workers from low-ability workers.
2. This implies that when people earn a college degree, they do not become more productive,
3. This occurs because it is easier for high-ability people to get college degrees; therefore, more
high-ability people get college degrees.
E. The Superstar Phenomenon
1. Superstars arise in markets that have two characteristics.
a. Every customer in the market wants to enjoy the good supplied by the best producer.
b. The good is produced with a technology that makes it possible for the best producer to
supply every customer at a low cost.
2. This is why we see superstars in some markets (entertainment, professional sports) and not
in others (plumbing, carpentry).
F. Above-Equilibrium Wages: Minimum-Wage Laws, Unions, and Efficiency Wages
1. For some workers, wages are set above the level that brings supply and demand into
balance.
a. Minimum-wage laws that generally apply to the least skilled and least experienced
workers.
b. Definition of union: a worker association that bargains with employers over
wages and working conditions.
344 ❖ Chapter 19/Earnings and Discrimination
d. Definition of efficiency wages: above-equilibrium wages paid by firms to
increase worker productivity.
3. Above-equilibrium wages raise the quantity of labor supplied and lower the quantity
demanded, creating a surplus of labor.
II. The Economics of Discrimination
characteristics.
B. Measuring Labor-Market Discrimination
1. Table 2 reports median annual earnings by race and gender for 2011.
b. The median black woman was paid 11% less than the median white woman.
c. The median white woman was paid 25% less than the median white man.
2. However, it is difficult to determine how much of the differential in wages across different
groups can be attributed to discrimination.
b. It is also likely that the quality of education may differ as well.
c. Women generally have less labor market experience than men.
compensating wage differential.
3. Because the differences in median earnings 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.
4.
Case Study: Is Emily More Employable than Lakisha?
resumes.
Table 2
Chapter 19/Earnings and Discrimination ❖ 345
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b. Half of the resumes had names that were common in the African-American community,
while the other half had names that were more common among the white population.
Otherwise, the resumes were similar.
c. Job applicants with “white” names received about 50% more calls from interested
employers than applicants with “African–American” names.
C. Discrimination by Employers
motive.
2. Example: Two types of people, blondes and brunettes. Both groups have the same skills,
experience, and work ethic. But employers prefer to hire brunettes.
b. This also means that blondes will earn a lower wage than brunettes.
3. In this economy, there is an easy way for a firm to beat out its competitors: hire all blondes.
b. Over time, we would expect more firms to follow this example.
c. The existing firms still hiring brunettes would be forced out of business due to their
higher labor costs.
4. Businesses that care about earning a profit are at an advantage when competing against
those that also care about discriminating.
5.
Case Study: Segregated Streetcars and the Profit Motive
b. In fact, many firms that ran the streetcars protested these laws because of the increase
in the firms’ costs from the law (which meant lower profits).
D. Discrimination by Customers and Governments
wage differentials.
a. If customers do not care whether they are being waited on by a blonde or a brunette,
b. If customers prefer brunettes, the entry of firms that hire blondes will not succeed in
eliminating the wage differential between blondes and brunettes.