C

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.