• 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.