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346 ❖ Chapter 19/Earnings and Discrimination
2. Also, if the government mandates discriminatory practices, then the wage differentials
between the groups will continue to exist.
3.
Case Study: Discrimination in Sports
a. Studies of sports teams suggest that racial discrimination is common and that much of
the blame lies with the customers.
b. One study found that black basketball players earned 20% less than white players of
comparable ability did. Attendance at basketball games was also higher for teams with a
larger proportion of white players. So even if the team owners cared only about profit,
the customer discrimination makes hiring black players less profitable than white players.
c. The same situation was found in baseball in the 1960s, but more recent studies suggest
that the wage differential in baseball no longer exists.
d. Even the value of baseball cards has been affected by discrimination. A 1990 study found
that the cards of black hitters sold for 10% less than the cards of comparable white
hitters. The cards of black pitchers sold for 13% less than the cards of comparable white
pitchers.
E.
In the News: Gender Differences
1. Economic research is shedding light on why men and women often choose different career
paths.
2. This article from
The New York Times
describes experimental research aimed at explaining
Activity 1—Even Money
Type: In-class assignment
Topics: Incentives, distribution of income
Materials needed: None
Time: 20 minutes
Class limitations: Works in any size class
Purpose
This assignment explores labor market issues by looking at an artificial situation of complete
equality. Notions of incentives and job differences are explored. This usually provokes lively
discussion, particularly if the proposal is presented as a realistic alternative.
Instructions
Have the class answer the following questions. Give them time to write an answer to a
question, then discuss their answers before moving to the next question.
everyone is paid exactly the same salary. Assume that each family would receive an equal
share of GDP.
1. Would you personally favor this system? Explain.
2. What problems would exist?
3. What mechanisms could be enacted to overcome these problems?
Chapter 19/Earnings and Discrimination ❖ 347
4. Who would benefit from this system?
5. What jobs would be hard to fill?
Common Answers and Points for Discussion
1. Would you personally favor this system? Explain.
Most students oppose a completely egalitarian distribution of income. Some expect to
earn more under the existing system. Others see a variety of problems that make
equality unworkable. Others simply see it as “un-American.”
2. What problems would exist?
Numerous problems exist. National income may fall if the incentives to work are
inventions and technological advance could be hindered. Saving and investment and
investment rates would be low. Education would become unimportant. Immigration
rates could increase.
Income could still be denied to people who did not work, and workers could still be fired
for inadequate effort. Households could be required to participate in the labor force.
Unpleasant jobs could be modified to improve safety, sanitation, or difficulty. Shorter
hours could be assigned to those performing the least desirable work. In short, a
complete set of alternative incentives would have to be developed. These incentives
become increasingly complex as more and more aspects of the price system are
4. Who would benefit from equalizing the distribution of income?
A vast majority of households would gain (in the short run, if the system worked)
5. What jobs would be hard to fill?
Students break into two groups on this question. Many see the undesirable jobs as
menial, rote, unsafe, or unclean. Slaughterhouses, garbage disposal, and assembly-line
A relevant follow-up question is: “Why would these jobs be hard to fill at $90,000 a
year, when people currently work these jobs for much lower wages?”
Another group of students think professional jobs would be undesirable. Doctors,
lawyers, and executives are their examples.
Ask them, “Are these jobs worse than sucking the guts out of a dead chicken? These
jobs seem to have better working conditions, high levels of personal autonomy, and
some interesting challenges. Are people in these jobs motivated by more than money?”
Looking at the best jobs, many students seem to feel the ultimate “fun job” would be in
professional sports. Ask them why these workers need to receive millions of dollars in
compensation.
This assignment can be used to introduce a number of topics such as market allocation
of resources, distribution of income, risk premiums, compensating differentials, and
returns to human capital.
348 ❖ Chapter 19/Earnings and Discrimination
SOLUTIONS TO TEXT PROBLEMS:
Quick Quizzes
More educated workers earn more than less educated workers because they are more
productive, so employers are willing to pay them more, and because more education may
signal greater innate ability.
Profit-maximizing firms tend to eliminate discriminatory wage differentials because if some
set of workers were being discriminated against, it would be in the interest of profit-
maximizing firms to hire those workers with lower wages. But that, in turn, would raise the
wages of those workers until the wages of all similar workers were equal.
Questions for Review
1. Coal miners are paid more than other workers with similar amounts of education because
differential.
2. Education is a type of capital because it represents an expenditure of resources at one point
in time to raise productivity in the future.
4. The conditions that lead to highly-compensated superstars are: (1) every customer wants to
enjoy the good supplied by the best producer; and (2) the good is produced with a
technology that makes it possible for the best producer to supply every customer at a low
cost. Because one dentist could not supply every customer, you would not expect to see
expect to see superstars in music.
5. A worker’s wage might be above the level that balances supply and demand because: (1)
minimum-wage laws raise wages above the levels that some workers would earn in an
unregulated labor market; (2) unions may have market power to raise wages above their
Chapter 19/Earnings and Discrimination ❖ 349
6. Deciding whether a group of workers has a lower wage because of discrimination is difficult
7. The forces of economic competition tend to ameliorate discrimination on the basis of race,
8. Discrimination can persist in a competitive market if customers have a preference for
discrimination. For example, if customers prefer blonde waiters to brunettes, restaurants will
prefer to hire blonde waiters and they will discriminate against brunettes.
Quick Check Multiple Choice
1. b
2. a
3. d
4. c
5. c
6. a
Problems and Applications
1. a. The opportunity cost of taking a job as a summer intern that pays little or nothing is the
wage that the student could earn at an alternative job.
job training.
c. You would expect that students who were interns earn higher incomes later in life.
2. The single minimum wage might distort the labor market for teenage workers more than for
3. People with more experience usually have had more on-the-job training than others with the
same formal education but less experience. Such training increases the value of the marginal
product of their labor. Job tenure is also valuable, because people gain job-specific
knowledge or a specialization in knowledge that is useful to the firm.
b. Differences in teaching loads can make up for lower pay. If professors in all fields are
paid the same, the pay level is probably below what economics professors could earn
350 ❖ Chapter 19/Earnings and Discrimination
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elsewhere. To attract economics professors, the university would have to offer them
some other compensation, such as a lower teaching load.
5. Under the signaling theory, you would rather have the degree and not attend the university.
But under the human-capital theory, you would rather attend, even though doing so would
be a secret.
average musician fell.
7. a. People respond to incentives. Merit pay provides an incentive for teachers to work
harder.
c. A large challenge would be to accurately measure the teachers’ performance.
d. Because incentives matter, it should be able to secure better teachers by offering higher
wages.
the time may not have followed his strategy because their customers may have preferred
male consultants.
9. If brunette workers do not like working with blonde workers, a blonde worker's marginal
profit-maximizing entrepreneur could create a firm using all blonde workers, so there would
over time.
