Chapter 19 - Earnings and Discrimination

• Wages are determined by the labor supply and labor demand.
• Equilibrium: each worker is paid relative to how much they contribute to creating the goods and services
• However, there are still disparities.

19-1 Some Determinations of Equilibrium Wages

• Workers all have their unique strengths. Therefore, jobs are also differentiated and assigned to workers who are best suited for the task.

Compensating Differentials

• Jobs can be differentiated by the work they take part in, but also by how dangerous they are and entertaining they are.
• Jobs that are less dangerous and more entertaining would be more attractive to the market.
• Jobs that are more dangerous and less entertaining are usually placed at a higher wage than the “fun” ones to make the offer more attractive.
• Compensating differential: wage differences that are caused by non-monetary factors and characteristics

Human Capital

• Capital: an economy’s stock of equipment and structures. A product that has been produced with the factors of production.
• Human capital: accumulation of investments in people. The most common example of this is education.
• Workers with more human capital (ex: education) will earn more than workers with less human capital.
• People who hire will pay more with more educated workers because the workers have higher marginal products.
• Future workers/workers will pay for colleges and other types of education if there is an incentive to do so.

Ability, Effort, and Chance

• Natural ability is important. If a worker is naturally better at a job, they will likely ascend the role hierarchy.
• Similarly, if someone is a hard worker, they will be more productive and earn higher wages.
• Bonuses are usually issued to these types of workers based on their performances. Others are paid a percentage of the sales they make. Either way, the more the workers produce, the more they can expect to receive in the form of cash or social incentives.
• Chance can both negatively and positively affect wages. However, this phenomenon is not studied often due to its variability and how random it is.
• Variation in wages is usually not explained by companies and corporations, but variables like ability, effort, and chance are usually most prevalent.

An Alternative View of Education: Signaling

• Higher education signals high ability. It is not a direct relationship (or cause) to higher productivity, but it is a signal.
• Signals of abilities can often be seen in resumes, where workers’ experience and education are revealed.
• This is similar to the signaling theory of advertising, where if a company is willing to spend money on advertising, the quality of the product must be worth that money.
• Essentially, willingness to attend school is usually related to willingness to be more productive in a company.
• According to the human-capital view, education makes workers more productive.
• According to the signal theory of advertising, education signals the likelihood to be productive.
• Both views explain why higher educated workers are paid more. It is very likely the “true” answer is a mix between these two views.

The Superstar Phenomenon

• Usually prevalent in entertainment jobs like sports and movies, “superstars” are people who are good at entertaining.
• Their job causes them to be broadcasted around the world, which is why they are paid more. They are able to draw in more customers than a plumber, or carpenter.

Above-Equilibrium Wages: Minimum-Wage Laws, Unions, and Efficiency Wages

• Sometimes, wages are above equilibrium. There are three potential reasons why this occurs:
• A minimum wage mostly affects regulations of low-effort jobs.
• The market power of labor unions, when left unsatisfied, can negatively affect a job.
  • Union: a group of workers that makes deals with employers for fair wages and working conditions. If they are left very unhappy, they can call a strike.
  • Strike: when a large group of workers refuses to work.
• The theory of efficiency wage increases worker morale and productivity.
  • Efficiency wages: when a firm pays high wages for workers to feel more motivated and make the workplace more attractive.
• These above-equilibrium wages affect the market. It increases labor supplied and reduces labor demanded.

19-2 The Economics of Discrimination

• Discrimination: when the marketplace offers and rescinds opportunities to similar people, only differentiated by personal characteristics.

Measuring Labor-Market Discrimination (all statistics found in the USA)

• The median black man is paid 21% less than the median white man.
• The median black woman is paid 15% less than the median white woman.
• The median white woman is paid 20% less than the median white man.
• The median black woman is paid 13% less than the median black man.
• Employers, from these statistics, discriminate against blacks and women.
• Even without discrimination, price differences are still vast due to the difference in jobs. So, just observing these statistics does not prove employers actively discriminate.
  • In 2017, 34% of white Americans had a college degree. 24% of black Americans had a college degree. (ages >24)
  • Public schools in predominantly black areas can be observed as being lower quality compared to public schools in predominantly white areas.s
  • Women are also more likely to pause their jobs to raise children. Because of this, older women are likely to have less job experience.
  • Men and women do not look for the same type of work, causing differences in pay.
• Differences in human capital among groups of workers can show discrimination.
  • Ex: certain groups of people are subject to a lesser curriculum.

Discrimination by Employers

• Business owners may be tempted to hire discriminated workers because they are paid less. (Ex: women instead of men).
• Because of this, women are wanted more than men, and their value begins to rise.
• Eventually, the wage differential will disappear.

Discrimination by Customers and Governments

• Customer preferences and government policies affect wages.
• If consumers only care about quality and price, discrimination techniques will lessen as well as the wage differential.
• If consumers discriminate, the wage differential will not disappear.
• If the government actively encourages discrimination (ex: segregation) the wage differential will not disappear.

Statistical Discrimination

• Statistical discrimination: employers do not have pinpoint accuracy on employees. Therefore, they use observable traits and stereotypes to estimate the best employee.
• Employers prefer to not hire workers with criminal records because some of these people could be considered dangerous.

19-3 Conclusion

• Wages are determined by marginal contribution to the work employees partake in.
• The marginal product value depends on the type of employee.

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