Chapter 26 (13 Micro)
Earnings, Productivity, and the Job Market
OUTLINE
1. Why Do Earnings Differ?
A. Earnings would be equal if:
2. all jobs were equally attractive.
3. workers were perfectly mobile among jobs.
B. Earnings Differentials Due to Non-identical Workers
1. Worker Productivity and Specialized Skills.
a. More productive workers have greater earnings.
2. Worker Preferences.
3. Race and Gender.
a. Discrimination may lower earnings opportunities of women and minorities.
C. Earnings of Skilled and Unskilled Workers
D. Education Leads to Higher Earnings
E. Earnings Differentials Due to Non-identical Jobs
2. Compensating wage differentials can be due to a variety of causes such as:
a Job risk.
b Job location.
c Working hours.
F. Earnings Differentials Due to Immobility of Labor
1. Some wage differentials result from an incomplete adjustment to a labor demand
change due to labor immobility.
2. Immobility can result from:
a. Specialized labor.
b. Institutional barriers.
II. The Economics of Employment Discrimination
A. Wage Discrimination
1. Majority workers are preferred to minority workers (or men to women) and so
demand is reduced for minority workers.
246 Chapter 26 (13 Micro)/Earnings, Productivity, and the Job Market
2. Impact of wage discrimination.
B. Employment Discrimination
1. Minority and female workers are restricted in the types of jobs and occupations
2. Discrimination is costly to employers.
(1) Nondiscriminatory employers will have lower costs than employers who
discriminate.
C. Employment Discrimination and Earnings of Minorities
1. Earnings may differ among groups for reasons other than employment
discrimination.
2. To measure discrimination, we must:
a. Adjust earnings for differences between groups in productivity-related factors
such as education.
III. The Link Between Productivity and Earnings
A. Link Between Output and Earnings
2. Workers in the U.S. earn high wages because their output per hour is high as a
result of:
a. Greater worker knowledge and skills (human capital).
b. The use of modern machinery (physical capital).
B. Automation
1. Automated methods of production will only be adopted if they reduce costs.
3. Improved technology permits us to achieve larger output and income levels.
C. Productivity, Wages, and the Computer Revolution
1. Since 1996, the growth of productivity in the United States has increased well
2. Most economists believe that the recent acceleration in productivity growth is
largely the result of the computer revolution and related technological innovations
Chapter 26 (13 Micro)/Earnings, Productivity, and the Job Market 247
OBJECTIVES
This chapter focuses on the role of prices (wages) in the allocation of labor services (human capital).
The following chapter analyzes the role of prices in the allocation of capital resources.
There are three reasons why wage rates differ: (1) differences among workers with regard
to skill level, preferences, and individual characteristics; (2) differences among jobs (working
conditions); and (3) imperfect information and resource mobility. The text discusses why each of
these factors leads to wage differences. It also provides extensive discussions of employment
discrimination, and the link between productivity and earnings. Lastly, it discusses the link between
productivity and earnings.
IMPORTANT POINTS AND TEACHING SUGGESTIONS
1. Differences in: (a) individual skills and experience, (b) jobs, and (c) the mobility of resources
explain why earnings vary among workers. Some people have greater productivity (for
example, cognitive and non-cognitive skills, specialized talents, native abilities) than others.
2. Students have difficulty grasping the impact of employment discrimination on earnings. Be
sure to point out that earnings differences according to race or sex may be the result of factors
3. Typically, students perceive that employers benefit from discrimination. Economic theory
suggests that this view is incorrect. If an employer could hire minority employees at a wage
rate lower than that paid equally productive non-minority workers, he could reduce his costs
4. Students seldom see the link between real income and output. Output and real income are
simply opposite ways of viewing the same thing. When output expands, resource suppliers gain
5. Both employee compensation and self-employment earnings are primarily returns on human
7. Students are often troubled by wage differentials, which nonetheless have a significant
economic function. Discuss how wage differentials mediate between the following groups:
a. college graduates compared to high-school graduates;
b. skilled versus unskilled laborers;
8. Critical Analysis questions 2, 6, and 16 should help to stimulate classroom discussions of
9. As an illustration of how fringe benefits are included in the calculations of workers, you can
use the consumption benefits a university provides in addition to human capital production.
Going to school provides both investment in human capital and current consumption
Chapter 26 (13 Micro)/Earnings, Productivity, and the Job Market 249
HINTS FOR ANSWERING CRITICAL ANALYSIS QUESTIONS
7. a. Not unless it leads to production of a service that is valued highly others.