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-of-

town 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.

Wages

Quantity

Earnings Differences: Skilled and Unskilled Workers

Du

Ds

Ss

Su

• 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.

Ws

Wu

• Skilled workers face strong demand and small supply relative to unskilled workers.

Less than9th grade

HighSchool

Some college

Bachelor’sdegree

Master’sdegree

Doctoraldegree

• The earnings of both men and women increase with education.

• Note, though, that women’s earnings were only about 2/3 those of similarly educated men.

Level of Education and Earnings (and Discrimination)

24,595

35,121

42,946

62,543

75,411

107,988

23,498

29,500

49,635

69,085

40,263

18,578 Women

Men

Mean earnings ($) ofyear-round-full-time workers (2000)

56% of men’s

Less thanhigh school

Highschool

Some college

Bachelor’sdegree

Master’sdegree

Doctoraldegree

• Both still increase with education.

• Updated in 2001

• Women’s earnings still about 2/3 those of similarly

educated men.

Level of Education and Earnings

27,190

37,362

45,271

70,253

87,022

118,853

26,660

32,511

57,770

71,608

45,290

22,361 Women

Men

Mean earnings ($) ofyear-round-full-time workers (2001)

10% above 2000

14% above 200066% of men’s

•Less thanhigh school

•Highschool

•Some college

•Bachelor’sdegree

•Master’sdegree

•Doctoraldegree

Level of Education and Earnings

•28,415

•40,112

•49,537

•75,130

•95,794

•136,567

•28,657

•35,521

•59,569

•92,650

•49,326

•20,508 •Women

•Men

•Mean earnings ($) ofyear-round-full-time workers (2005)

• Both still increase with education.

• Updated in 2005

• Women’s earnings still about 2/3 those of similarly

educated men.

14.9% from 200114.9% from 200147% of men’s

•Less thanhigh school

•Highschool

•Some college

•Bachelor’sdegree

•Master’sdegree

•Doctoraldegree

• The earnings of

both men & women

increase with education.

• Updated in 2007

Women’s earnings

still only about 2/3

those of similarly

educated men.

Level of Education and Earnings

•30,602

•42,042

•50,103

•77,536

•94,763

•132,706

•30,657

•38,396

•63,156

•85,190

•52,857

•21,906 •Women

•Men

•2000

2005

2007

• Bachelor’s Degree

•Comparison over time

77,536

52,857

•Women

•Men62,543

40,263

2001 70,253

45,290

75,130

49,326

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

1. Wage Discrimination

Discrimination

2. Employment Discrimination

Lower wages for minorities

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.

Employment discrimination causes the demand for minority services to decrease.

Dminorities

S

Wages

EmploymentQm

WmB

Qw

Dwhites

AWw

Impact of Wage Discrimination

• The result is lower demand, and the equilibrium wage will be at a lower level, Ww > Wm .

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

Quantity

Du

Su

Wn

Wu

SuWages

Quantity

Du

Sr

Wr

Wn

Sr

Employment DiscriminationDiscrimination 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.

Men WomenActual Adjusted Actual Adjusted

* 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.

White 100 100 100 100 African-American American Indian Asian-American Mexican-American Other Hispanic

79 82 100 67 79

86 92 94 93 92

90 88

103 75 85

94 96 97 98 95

The Actual and Productivity Adjusted Wagesof Minorities Compared to Whites

2003-2006*

•Men •Women•Actual •Adjusted •Actual •Adjusted

•a Primarily Chinese-Americans and Japanese-Americans.

•White •100 •100 •100 •100 •African-American •American Indian •Asian-American

a •Mexican-American •Other Hispanic

•78 •82

•102 •64 •75

•85 •95 •90 •88 •87

•89 •85

•106 •72 •83

•92 •98 •94 •94 •91

•The Actual and Productivity-Adjusted Wagesof Minorities Compared to Whites

2003-2006*

•* 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.

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

Productivity and Earnings

• 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.

•Rise in real compensation •(private business sector)

•Rise in output per hour •(private business sector)

•1974–1995 •1996–2006•1948–1973

•3.2 %•2.8 %

•1.5 %

•0.7 %

•2.9 %

•2.0 %

•Annual rate of increase of productivity and real wages

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.

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 thata. 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.

1. If all persons had identical preferences and productivity factors (ability, skill level, education, experience, etc.), the highest paying jobs would be the mosta. prestigious. b. convenient.c. undesirable. d. easily learned.2. Automated production methods are only attractive when theya. are undertaken in heavily unionized sectors of the economy.b. reduce per-unit costs. c. replace workers.d. decrease labor productivity.

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 becausea. 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 ifa. 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 ifa. 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 thata. 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 workb. provision of goods and/or services that others value highlyc. having a graduate degree in a field like history or sociologyd. membership in a labor union10. “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 area. 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.