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340
mination
WHAT’S NEW IN THE SIXTH EDITION:
There are no major changes to this chapter.
LEARNING OBJECTIVES:
By the end of this chapter, students should understand:
➢ how wages compensate for differences in job characteristics.
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.
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 being equal, workers in hard, unpleasant jobs get paid more
than workers in easy, pleasant jobs do.
• 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.
CHAPTER OUTLINE:
I. Some Determinants of Equilibrium Wages
A. Compensating Differentials
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.
2. Workers with more human capital on average earn more than those with less human capital.
b. We can see that there has been an increase in this difference over time.
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.
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
4.
Case Study: The Benefits of Beauty
a. Daniel Hamermesh and Jeff Biddle used data from surveys conducted in the United
States and Canada to try to determine how wages are affected by physical appearance.
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.
E.
In the News: The Human Capital of Terrorists
1. Workers with more education are better at all kinds of tasks, even those aimed at
destruction.
F. 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.
G. Above-Equilibrium Wages: Minimum-Wage Laws, Unions, and Efficiency Wages
344 ❖ Chapter 19/Earnings and Discrimination
a. Minimum-wage laws that generally apply to the least skilled and least experienced
workers.
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
A. Definition of discrimination: the offering of different opportunities to similar
individuals who differ only by race, ethnic group, sex, age, or other personal
characteristics.
a. The median black man was paid 21% 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.
a. For example, the quantity of education often differs between blacks and whites.
Table 2
Chapter 19/Earnings and Discrimination ❖ 345
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?
a. Economists Marianne Bertrand and Sendhil Mullainatham answered more than 1,300
help-wanted ads run in Boston and Chicago newspapers by sending in nearly 5,000 fake
resumes.
C. Discrimination by Employers
1. It may be incorrect to blame employers for discrimination because each firm has a profit
motive.
2. Example: Two types of people, blondes and brunettes. Both groups have the same skills,
experience, and work ethic. But employers prefer not to hire blondes.
3. In this economy, there is an easy way for a firm to beat out its competitors: hire all blondes.
a. This firm would pay lower wages and therefore have lower costs.
b. Over time, we would expect more firms to follow this example.
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
346 ❖ Chapter 19/Earnings and Discrimination
D. Discrimination by Customers and Governments
1. Customer preferences may limit the ability of the profit motive to eliminate discriminatory
wage differentials.
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.
E.
In the News: Gender Differences
1. Recent economic research is shedding light on why men and women often choose different
career paths.
Chapter 19/Earnings and Discrimination ❖ 347
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
1. Would you personally favor this system? Explain.
2. What problems would exist?
3. What mechanisms could be enacted to overcome these problems?
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
2. What problems would exist?
Numerous problems exist. National income may fall if the incentives to work are
3. What mechanisms could be enacted to overcome these problems?
Income could still be denied to people who did not work, and workers could still be fired
348 ❖ Chapter 19/Earnings and Discrimination
SOLUTIONS TO TEXT PROBLEMS:
Quick Quizzes
1. A compensating differential is a difference in wages that arises to offset the nonmonetary
characteristics of different jobs. Examples include coal miners who earn extra wages to
2. It is hard to establish whether a group of workers is being discriminated against because
there are many reasons other than discrimination for wages to differ across workers, such as
differences in human capital and job characteristics.
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
work are frequent examples.
Chapter 19/Earnings and Discrimination ❖ 349
Questions for Review
1. Coal miners are paid more than other workers with similar amounts of education because
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.
3. Education might raise a worker's wage without raising the worker's productivity if education
works as a signal that the worker has high ability.
4. The conditions that lead to economic 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
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
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
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.
350 ❖ Chapter 19/Earnings and Discrimination
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
adult workers because: (1) teenagers have a lower value of marginal product, so it is more
3. People with more experience usually have had more on-the-job training than others with the
4. a. Economics professors may receive higher salaries than professors in some other fields
because they have better opportunities outside academia. For example, they could find
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.
6. The development of recording devices led to a superstar phenomenon in which the best
7. a. People respond to incentives. Merit pay provides an incentive for teachers to work
harder.
8. Yes, his behavior is profit maximizing. He is hiring labor at a lower cost. You might claim that
Alan is despicable because he is discriminating against men. Some might claim that Alan was
admirable, though, because he is maximizing profit and giving women a better opportunity to
Chapter 19/Earnings and Discrimination ❖ 351
9. a. Figure 1 shows a situation in which young women are channeled into careers as
secretaries, nurses, and teachers. The left panel shows the labor market for secretaries,
nurses, and teachers, and the right panel shows the labor market for other fields. The
large supply of people in the secretarial, nursing, and teaching fields depresses the wage
in those fields. On the other hand, the smaller supply of labor in other fields raises the
relative wage.
10. If brunette workers do not like working with blonde workers, a blonde worker's marginal
product of labor is likely to be lower, because the firm's output will not be as high compared
to the case if the firm had a brunette worker instead. Thus, firms might find that blonde
