Compensating Differentials and Labor Discrimination

Compensating Differentials

  • The danger of a dangerous job reduces the supply of labor, pushing the supply curve for labor to the left and up
    • The resulting wage is higher than it normally would be
  • Compensating differential: a difference in wages that offsets differences in working conditions for otherwise similar jobs
  • Similar jobs must have similar compensation packages
    • What would happen if musicians were paid more than accountants?
    • This means higher wages and more fun being a musician
    • Supply of musicians will increase and supply of accountants will decrease 
    • Increased supply of musicians will drive down wages of musicians and decreased supply of accountants will increase wages for them
  • Workers become less willing to accept risk as economic growth makes them wealthier 
  • When firms make jobs safer, they can pay lower wages, which increases their profits
  • Market competition (employers luring laborers by offering better packages of wages and working conditions ) is the major factor in making jobs safer
    • As workers become wealthier and less willing to take on risk, firms have greater incentives to increase job safety

Labor Discrimination

Statistical Discrimination

  • Statistical discrimination: using information about group averages to make conclusions about individuals

Preference-Based Discrimination

  • Dislike of a group of people, such as race, religion, or gender
  • Can be discrimination by employers, customers, or employees

Discrimination By Employers

  • Some employers don’t want to hire people because of race, ethnicity, gender, or religion
  • If this discrimination is widespread, the wages of people who are discriminated against will fall since the demand for their labor falls
  • This type of discrimination tends to solve itself because…
    • It is expensive to the employer 
    • Leaves the employer open to be outcompeted

Discrimination By Customers

  • When customers discriminate, employers aren’t as willing to hire undervalued workers
  • Discrimination is weakened by economic growth 
    • Declining costs of production make it possible for businesses to take more chances

Discrimination By Employees

  • Sometimes workers don’t want to work with others
  • Profit incentive doesn’t break down discrimination of this kind
    • Ex: an employers in india who hires Dalits may have to pay workers a higher wage to compensate them for the negative experience of working with Dalits
    • Basically, in this case, it is cheaper to discriminate than to hire everyone equally