• Wages are determined by the labor supply and labor demand.

  • See Chapter 18 for more information.

• Equilibrium: each worker is paid relative to how much they contribute to create the goods and services

• However, there are still disparities.

Chapter 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.

• 19.1a: Compensating Differentials

  • Jobs can be differentiated by the work they take part in, but also 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

• 19.1b: 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 educations if there is an incentive to do so.

• 19.1c: 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.

• 19.1d: 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 is 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.

    • See Chapter 16 for more details about the signaling theory of advertising.

  • 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.

• 19.1e: 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.

• 19.1f: 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 which 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 refuse to work.

    • The theory of efficiency wage which 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 effect the market. It increases labor supplied and reduces labor demanded.

Chapter 19.2: The Economics of Discrimination

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

• 19.2a: Measuring Labor-Market Discrimination (all statistics found in 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 of being lower quality compared to public schools in predominantly white area.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 of groups of workers can show discrimination. EX: certain groups of people are subject to a lesser curriculum.

• 19.2b: 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.

• 19.2c: Discrimination by Customers 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.

• 19.2d: Statistical Discrimination

  • Statistical discrimination: employers do not have pinpoint accuracy on employees. Therefore, they use observable traits and stereotypes to estimate the best employee.

  • Employees prefer to not hire workers with criminal records because some of these people could be considered dangerous.

Chapter 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.