Chapter 19

Determinants of Equilibrium Wages (Simplified Notes)

1. Jobs Are Different, Wages Are Different

• Compensating Differentials: Wage differences due to job characteristics (safety, difficulty, fun, etc.).

  • "Bad" jobs → Higher wages to attract workers.

  • "Good" jobs → Lower wages because of nonmonetary benefits.

  • Examples:

    • Night shift pays more than day shift.

    • Coal miners earn more due to dangerous conditions.

2. Human Capital

• Represents investments in people (e.g., education, training).

• Higher education → Higher productivity → Higher wages.

• Wage gap between educated and uneducated workers compensates for education costs.

• Causes of increasing wage inequality:

  • Demand for skilled labor ↑ (due to trade and tech).

  • Demand for unskilled labor ↓ (due to automation and imports).

3. Ability, Effort, and Chance

• Earnings are affected by:

  • Natural Ability (intelligence, strength, skill).

  • Effort (hard work → higher pay).

  • Chance (right skills at the right time).

  • Example: Beauty or timing (learning a trade before it becomes obsolete).

4. Education as Signaling

• Education signals ability to employers, even if it doesn’t increase productivity.

• Two views:

  • Human Capital: Education improves productivity.

  • Signaling: Education reveals natural ability.

5. The Superstar Phenomenon

• Some professions (e.g., acting, sports) allow top performers to earn much more due to:

  • Everyone wanting the best producer's product.

  • Technology enabling one person to serve many (e.g., TV, streaming).

6. Wages Above Equilibrium

• Occurs when wages exceed the market rate, causing surplus labor (unemployment).

  • Minimum Wage: Legal floor on wages.

  • Unions: Negotiate higher wages, sometimes through strikes.

  • Efficiency Wages: Firms pay extra to boost productivity (reduce turnover, attract talent).

The Economics of Discrimination

1. What is Discrimination?

• Different opportunities for similar individuals due to race, gender, age, etc.

2. Measuring Discrimination

• Wage gaps aren’t solely due to discrimination—education, working conditions, and other factors matter.

  • Example: Men and women may choose different types of jobs based on conditions.

3. Types of Discrimination

• By Employers: Firms hiring based on biases lose profits in competitive markets.

• By Customers: Customers' preferences for discrimination can maintain wage gaps.

• By Governments: Discrimination enforced by law (e.g., segregation).

4. Statistical Discrimination

• Judging individuals based on group attributes rather than personal qualifications.

  • Example: Not hiring people with criminal records, even if irrelevant to job performance.