1. Which person would you expect to earn more?
What are the major factors that would normally
explain earnings differences between them?
a. (1) a lawyer and (2) a minister,
b. (1) an accountant and (2) a school teacher,
c. (1) a business executive and (2) a social worker,
d. (1) a country lawyer and (2) a Wall Street lawyer,
e. (1) an experienced, skilled craftsperson and
(2) a 20-year-old high school dropout, and,
f. (1) an upper-story & (2) a ground-floor window
washer?
2. Should the following people expect to get (1)
higher or (2) lower wages?
•
•
•
•
•
•
The employee must work the midnight to 8 am
shift.
The job involves broken intervals (work 3 hours,
off 2 hours, work 3 additional hours, and so on) of
employment during the day.
The employer provides low-cost childcare services
on the premises.
The job is viewed as prestigious.
The job requires employees to move often from
city to city.
The job requires substantial amounts of out-oftown travel
Earnings, Productivity,
and the Job Market
Why Do Earnings Differ?
1. Non-identical Workers
2. Non-identical Jobs
3. Immobility of Labor
Earnings Differentials:
1. Non-identical Workers
• Worker productivity:
• More productive more money
• Tournament pay
• Worker preferences:
• If money is most important, pursue jobs
with higher wages.
• Race and gender:
• Discrimination.
Earnings Differences:
Skilled and Unskilled Workers
• The wages of unskilled workers are low relative to skilled
workers due to the less demand and large supply of
skilled workers relative to unskilled workers.
Wages
• Skilled workers
face strong demand
and small supply
relative to unskilled
workers.
Ws
Wu
Ss
Su
Ds
Du
Quantity
Level of Education and Earnings
(and Discrimination)
• The earnings of
both men and
women increase
with education.
Less than
9th grade
High
School
Some
college
• Note, though,
Bachelor’s
that women’s
degree
earnings were only
about 2/3 those of
Master’s
similarly educated
degree
men.
Doctoral
degree
Men
24,595
Women
18,578
35,121
23,498
42,946
29,500
62,543
40,263
75,411
49,635
107,988
56% of men’s
69,085
Mean earnings ($) of
year-round-full-time workers (2000)
Level of Education and Earnings
• Updated in 2001
• Both still increase
with education.
Less than
high school
High
school
Some
college
• Women’s earnings
still about 2/3
those of similarly Bachelor’s
degree
educated men.
Master’s
degree
Doctoral
degree
Men
27,190
Women
22,361
37,362
26,660
45,271
32,511
70,253
45,290
87,022
57,770
10% above 2000
71,608
14% above 2000
66% of men’s
Mean earnings ($) of
year-round-full-time workers (2001)
118,853
Level of Education and Earnings
• Updated in 2005
• Both still increase
with education.
•Less than
high school
•High
school
•Some
college
• Women’s earnings
still about 2/3
those of similarly •Bachelor’s
educated men.
degree
•Master’s
degree
•Men
•28,415
•Women
•20,508
•40,112
•28,657
•49,537
•35,521
•75,130
•49,326
•95,794
•59,569
14.9% from 2001
14.9% from 2001
47% of men’s
•Mean earnings ($) of
year-round-full-time workers (2005)
•Doctoral
degree
•136,567
•92,650
Level of Education and Earnings
• Updated in 2007
• The earnings of
both men &
women
increase with
education.
•Less than
high school
•High
school
•Some
college
Women’s earnings •Bachelor’s
degree
still only about
2/3
those of similarly •Master’s
degree
educated men.
•Doctoral
degree
•Men
•Women
•30,602
•21,906
•42,042
•30,657
•50,103
•38,396
•77,536
•52,857
•94,763
•63,156
•132,706
•85,190
• Comparison over time
•2000
• Bachelor’s
Degree
2001
62,543
•Men
40,263
•Women
70,253
45,290
2005
75,130
49,326
2007
77,536
52,857
Earnings Differentials:
2. Non-Identical Jobs
• Undesirable working conditions = higher wages
(compensating wage differentials).
• Compensating wage differentials factors:
•
•
•
•
Job risk
Job location
Working hours
Work environment
Earnings Differentials:
3. Immobility of Labor
• An incomplete adjustment to a change in
labor demand because of labor immobility.
• Immobility can result from:
• Specialized labor – derived demand, so lags
• Institutional barriers
• Minimum wage – fewer workers hired
• Occupational licensing - restricted
• Labor unions - restricted
Discrimination
1. Wage Discrimination
Lower wages for minorities
2. Employment Discrimination
Fewer jobs available for minorities
Wage Discrimination
• When majority workers are preferred to
minority workers (or men to women), demand
for minority workers is reduced.
• Minority workers receive lower wages.
Impact of Wage Discrimination
Wages
Employment discrimination
causes the demand for
minority services to
decrease.
• The result is lower
demand, and the
equilibrium wage will be at
a lower level, Ww > Wm .
S
Ww
Wm
A
B
Dwhites
Dminorities
Qm Qw
Employment
Employment Discrimination
• Discriminated workers are restricted in the
types of jobs and occupations they enter.
• Supply in the unrestricted jobs will increase,
causing wages to fall in these jobs.
• When the supply (of minorities) to an occupation
is restricted, the wages (of white males) will rise.
Wages
Wr
Wages
Sr
Wn
Du
Quantity
Su
Wn
Wu
Du
Quantity
Employment Discrimination
Discrimination is costly to employers.
• When employers can hire equally productive
minorities (or women) at a lower wage than whites
(men), the profit motive gives them a strong
incentive to do so.
• Employers who ignore minority and gender
status when employing workers will have lower
wage costs than employers who discriminate.
Employment Discrimination
and Earnings of Minorities
• Earnings may differ among groups for
reasons besides employment discrimination.
• To measure the extent of employment
discrimination, we must:
• Adjust earnings for differences between
groups in productivity-related factors such
as education
• Then make comparisons between similarly
qualified groups of workers who differ only
in race or gender.
The Actual and Productivity Adjusted Wages
of Minorities Compared to Whites
2003-2006*
Men
Actual
White
100
African-American
79
American Indian
82
100
Asian-American
Mexican-American 67
Other Hispanic
79
Adjusted
100
86
92
94
93
92
Women
Actual
Adjusted
100
90
88
103
75
85
100
94
96
97
98
95
* Data were supplied by David MacPherson, as derived from the Current
Population Surveys (CPS). Data were adjusted for years of schooling,
work experience, region, industry, sector of employment, union status,
and marital status.
•The Actual and Productivity-Adjusted Wages
of Minorities Compared to Whites
2003-2006*
•Men
•White
•African-American
•American Indian
•Asian-American a
•Mexican-American
•Other Hispanic
•Women
•Actual
•Adjusted
•Actual
•100
•78
•82
•102
•64
•75
•100
•85
•95
•90
•88
•87
•100
•89
•85
•106
•72
•83
•Adjusted
•100
•92
•98
•94
•94
•91
•a Primarily Chinese-Americans and Japanese-Americans.
•* Data were supplied by David MacPherson, as derived from the 2003-2006
Current Population Surveys (CPS). Data were adjusted for years of
schooling, work experience, region, industry, sector of employment, union
status, and marital status.
Productivity and Earnings
Link Between Output and Earnings
• Productivity is the source of high wages.
• Workers in the U.S. earn high wages because
their output per hour is high as a result of:
• Greater worker knowledge and skills (human
capital)
• The use of modern machinery
(physical capital)
Productivity and Earnings
•Annual rate of increase of productivity and real
wages
•3.2 %
•2.9 %
•2.8 %
•2.0 %
•1.5 %
•0.7 %
•1948–1973
•Rise in output per hour
•(private business sector)
•1974–1995
•1996–2006
•Rise in real compensation
•(private business sector)
• Productivity & compensation per hour are closely related.
• Relative to the 1948-1973 period, growth in productivity
and real wages slowed between 1973 and 1995. Both
rebounded substantially during the 1996-2006 time frame.
Productivity and the New Economy
• Productivity rebounded significantly between
1996 and 2003 after being low for the prior
20 years.
• New Era view
• Proponents argue the increase in productivity
growth is the result of increased amounts of
information technology capital as well as a
speedup in technological change.
• Temporary Factors
• Critics argue cyclical factors were responsible
for the productivity growth.
Automation
• Automated methods of production will only
be adopted if they reduce costs.
• Automation may reduce employment in a
specific industry.
• It also releases resources that can be
employed in other areas.
• Improved technology permits us to achieve
larger output and income levels.
1. If all persons had identical preferences and productivity factors
(ability, skill level, education, experience, etc.), the highest paying jobs
would be the most
a. prestigious.
b.
convenient.
c. undesirable.
d.
easily learned.
2. Automated production methods are only attractive when they
a. are undertaken in heavily unionized sectors of the economy.
b. reduce per-unit costs.
c. replace workers.
d. decrease labor productivity.
3. The fact that some people will work hard to earn a lot of money while
others will be content with much less income indicates that
a. worker preferences are an important source of earning differentials.
b. economics ranks one set of worker preferences as more desirable than
another.
c. some people can be paid less for doing hard work while others have to be
paid a premium for doing a similar task.
d. skill levels of laborers are a minor consideration in wage rate
determination.
4. Which of the following is most likely to reduce the nominal market wage
in a job category?
a. The job requires employees to work from 11 p.m. to 7 a.m.
b. The job is prestigious, and the work is quite interesting.
c. The job is widely viewed as dangerous.
d. The job requires employees to move from city to city quite often.
5. Wages in the United States are higher than those in India primarily
because
a. the weather is better in the United States.
b. a larger proportion of the labor force is unionized in the US.
c. less capital per employee is required in the United States.
d. the human and physical capital of American workers exceeds that of
their Indian counterparts.
6. Economic theory suggests that the standard of living of American
workers would rise if
a. the minimum wage were doubled.
b. automation were outlawed.
c. workers were forced to retire earlier.
d. technological improvements increased output per worker-hour.
7. The earnings of all employees in a competitive economy would be
equal if
a. all individuals were homogeneous.
b. all jobs were equally attractive.
c. workers were perfectly mobile among jobs.
d. all of the above are true.
8. When employment discrimination results from the personal
prejudices of employers, economic theory suggests that
a. it is costless for employers to discriminate against groups they do
not like.
b. the wages of employees who are discriminated against will actually
rise.
c. an employer who discriminates will experience higher costs.
d. discrimination by an employer will reduce production costs since
the employer can pay lower wages.
9. In a market economy, which of the following is most important if
one is going to achieve high earnings?
a. hard work
b. provision of goods and/or services that others value highly
c. having a graduate degree in a field like history or sociology
d. membership in a labor union
10. “Both buyers and sellers are protected by market competition.
Competition is the great regulator that protects consumers against
high product prices (relative to costs) and productive workers
against low wages.” These statements are
a. essentially true.
b. false; competition protects consumers but cannot protect
workers.
c. false; competition protects workers but cannot protect
consumers.
d. true, when consumer protection organizations are active and labor
unions are powerful; otherwise, it is false.