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Earnings and Discrimination
Earnings and Discrimination
   Differences in Earnings in the United States Today
     The typical physician earns about $200,000 a year.
     The typical police officer earns about $50,000 a year.

     The typical farm worker earns about $20,000 a year.
Earnings and Discrimination
   What causes earnings to vary so much?
     Wages    are governed by labor supply and labor
      demand.
     Labor demand reflects the marginal productivity of
      labor.
     In equilibrium, each worker is paid the value of his or
      her marginal contribution to the economy’s production
      of goods and services.
SOME DETERMINANTS OF
EQUILIBRIUM WAGES
   Compensating differentials
   Human capital
   Ability, effort, and chance
   Signaling
   The superstar phenomenon
Compensating Differentials

   Compensating differential refers to a difference in
    wages that arises from nonmonetary characteristics
    of different jobs.
     Coal  miners are paid more than others with similar
      levels of education.
     Night shift workers are paid more than day shift
      workers.
     Professors are paid less than lawyers and doctors.
Human Capital

   Human capital is the accumulation of investments in
    people, such as education and on-the-job training.
   The most important type of human capital is
    education.
Human Capital

   Education represents an expenditure of resources at
    one point in time to raise productivity in the future.
   By the year 2000, a man with a college degree
    earned more than 89 percent more than without
    one. Women showed a 70 percent increase in
    earnings due to a college degree.
Table 1 Average Annual Earnings
by Educational Attainment
Ability, Effort, and Chance

   Why has the gap in earnings between skilled and
    unskilled workers risen in recent years?
     Internationaltrade has altered the relative demand for
      skilled and unskilled labor.
     Changes in technology have altered the relative
      demand for skilled and unskilled labor.
Ability, Effort, and Chance

   Natural ability is important for workers in all
    occupations.
   Many personal characteristics determine how
    productive workers are and, therefore, play a role
    in determining the wages they earn.
An Alternative View of Education: Signaling

   Firms use educational attainment as a way of
    sorting between high-ability and low-ability
    workers.
     Itis rational for firms to interpret a college degree as
      a signal of ability.
The Superstar Phenomenon

   Superstars arise in markets that exhibit the
    following characteristics:
     Every  customer in the market wants to enjoy the good
      supplied by the best producer.
     The good is produced with a technology that makes it
      possible for the best producer to supply every customer
      at a low cost.
Above-Equilibrium Wages: Minimum-Wage Laws,
Unions, and Efficiency Wages

   Why are some workers’ wages set above the level
    that brings supply and demand into equilibrium?
     Minimum-wage   laws
     Market power of labor unions

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

   Unions
    A  union is a worker association that bargains with
      employers over wages and working conditions.
   Strike
    A  strike refers to the organized withdrawal of labor
      from a firm by a union.
Above-Equilibrium Wages: Minimum-Wage Laws,
Unions, and Efficiency Wages

   Efficiency Wages
     The  theory of efficiency wages holds that a firm can
      find it profitable to pay high wages because doing so
      increases the productivity of its workers. High wages
      may:
         reduce worker turnover.
         increase worker effort.
         raise the quality of workers that apply for jobs at the firm.
THE ECONOMICS OF
DISCRIMINATION
   Discrimination occurs when the marketplace offers
    different opportunities to similar individuals who
    differ only by race, ethnic group, sex, age, or other
    personal characteristics.
THE ECONOMICS OF
DISCRIMINATION
   Although discrimination is an emotionally charged
    topic, economists try to study the topic objectively in
    order to separate myth from reality.
Measuring Labor-Market Discrimination

   Discrimination is often measured by looking at the
    average wages of different groups.
Measuring Labor-Market Discrimination

   Even in a labor market free of discrimination,
    different people have different wages.
Measuring Labor-Market Discrimination

   People differ in the amount of human capital they
    have and in the kinds of work they are willing and
    able to do.
Measuring Labor-Market Discrimination

   Simply observing differences in wages among
    broad groups—white and black, men and women
    —says little about the prevalence of discrimination.
Table 2 Median Annual Earnings by Race and Sex




                                       Copyright©2004 South-Western
Measuring Labor-Market Discrimination

   Because the differences in average wages among
    groups in part reflect differences in human capital
    and job characteristics, they do not by themselves
    say anything about how much discrimination there is
    in the labor market.
Discrimination by Employers

   Firms that do not discriminate will have lower labor
    costs when they hire the employees discriminated
    against.
Discrimination by Employers

   Nondiscriminatory firms will tend to replace firms
    that discriminate.
Discrimination by Employers

   Competitive markets tend to limit the impact of
    discrimination on wages.
   Firms that do not discriminate will be more
    profitable than those firms that do discriminate.
Discrimination by Customers and Governments

   Although the profit motive is a strong force acting
    to eliminate discriminatory wage differentials, there
    are limits to its corrective abilities.
     Customerpreferences
     Government policies
Discrimination by Customers and Governments

   Customer preferences:
     Ifcustomers have discriminatory preferences, a
      competitive market is consistent with a discriminatory
      wage differential.
     This will happen when customers are willing to pay to
      maintain the discriminatory practice.
Discrimination by Customers and Governments

   Government policies:
     When   the government mandates discriminatory
      practices or requires firms to discriminate, this may also
      lead to discriminatory wage differentials.
Summary
   Workers earn different wages for many reasons.
   To some extent, wage differentials compensate
    workers for job attributes.
   Workers with more human capital get paid more
    than workers with less human capital.
Summary
   The return to accumulating human capital is high
    and has increased over the past decade.
   There is much variation in earnings that cannot be
    explained by things economists can measure.
Summary
   The unexplained variation in earnings is largely
    attributable to natural ability, effort, and chance.
   Some economists have suggested that more-
    educated workers earn higher wages because
    workers with high natural ability use education as a
    way to signal their high ability to employers.
Summary
   Wages are sometimes pushed above the
    equilibrium level because of minimum-wage laws,
    unions, and efficiency wages.
   Some differences in earnings are attributable to
    discrimination on the basis of race, sex, or other
    factors.
   When measuring the amount of discrimination, one
    must correct for differences in human capital and
    job characteristics.
Summary
   Competitive markets tend to limit the impact of
    discrimination on wages.
   Discrimination can persist in competitive markets if
    customers are
     willing to pay more to discriminatory firms,
     or if the government passes laws requiring firms to
      discriminate.

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Earnings and discrimination ppt bec bagalkot mba

  • 2. Earnings and Discrimination  Differences in Earnings in the United States Today  The typical physician earns about $200,000 a year.  The typical police officer earns about $50,000 a year.  The typical farm worker earns about $20,000 a year.
  • 3. Earnings and Discrimination  What causes earnings to vary so much?  Wages are governed by labor supply and labor demand.  Labor demand reflects the marginal productivity of labor.  In equilibrium, each worker is paid the value of his or her marginal contribution to the economy’s production of goods and services.
  • 4. SOME DETERMINANTS OF EQUILIBRIUM WAGES  Compensating differentials  Human capital  Ability, effort, and chance  Signaling  The superstar phenomenon
  • 5. Compensating Differentials  Compensating differential refers to a difference in wages that arises from nonmonetary characteristics of different jobs.  Coal miners are paid more than others with similar levels of education.  Night shift workers are paid more than day shift workers.  Professors are paid less than lawyers and doctors.
  • 6. Human Capital  Human capital is the accumulation of investments in people, such as education and on-the-job training.  The most important type of human capital is education.
  • 7. Human Capital  Education represents an expenditure of resources at one point in time to raise productivity in the future.  By the year 2000, a man with a college degree earned more than 89 percent more than without one. Women showed a 70 percent increase in earnings due to a college degree.
  • 8. Table 1 Average Annual Earnings by Educational Attainment
  • 9. Ability, Effort, and Chance  Why has the gap in earnings between skilled and unskilled workers risen in recent years?  Internationaltrade has altered the relative demand for skilled and unskilled labor.  Changes in technology have altered the relative demand for skilled and unskilled labor.
  • 10. Ability, Effort, and Chance  Natural ability is important for workers in all occupations.  Many personal characteristics determine how productive workers are and, therefore, play a role in determining the wages they earn.
  • 11. An Alternative View of Education: Signaling  Firms use educational attainment as a way of sorting between high-ability and low-ability workers.  Itis rational for firms to interpret a college degree as a signal of ability.
  • 12. The Superstar Phenomenon  Superstars arise in markets that exhibit the following characteristics:  Every customer in the market wants to enjoy the good supplied by the best producer.  The good is produced with a technology that makes it possible for the best producer to supply every customer at a low cost.
  • 13. Above-Equilibrium Wages: Minimum-Wage Laws, Unions, and Efficiency Wages  Why are some workers’ wages set above the level that brings supply and demand into equilibrium?  Minimum-wage laws  Market power of labor unions  Efficiency wages
  • 14. Above-Equilibrium Wages: Minimum-Wage Laws, Unions, and Efficiency Wages  Unions A union is a worker association that bargains with employers over wages and working conditions.  Strike A strike refers to the organized withdrawal of labor from a firm by a union.
  • 15. Above-Equilibrium Wages: Minimum-Wage Laws, Unions, and Efficiency Wages  Efficiency Wages  The theory of efficiency wages holds that a firm can find it profitable to pay high wages because doing so increases the productivity of its workers. High wages may:  reduce worker turnover.  increase worker effort.  raise the quality of workers that apply for jobs at the firm.
  • 16. THE ECONOMICS OF DISCRIMINATION  Discrimination occurs when the marketplace offers different opportunities to similar individuals who differ only by race, ethnic group, sex, age, or other personal characteristics.
  • 17. THE ECONOMICS OF DISCRIMINATION  Although discrimination is an emotionally charged topic, economists try to study the topic objectively in order to separate myth from reality.
  • 18. Measuring Labor-Market Discrimination  Discrimination is often measured by looking at the average wages of different groups.
  • 19. Measuring Labor-Market Discrimination  Even in a labor market free of discrimination, different people have different wages.
  • 20. Measuring Labor-Market Discrimination  People differ in the amount of human capital they have and in the kinds of work they are willing and able to do.
  • 21. Measuring Labor-Market Discrimination  Simply observing differences in wages among broad groups—white and black, men and women —says little about the prevalence of discrimination.
  • 22. Table 2 Median Annual Earnings by Race and Sex Copyright©2004 South-Western
  • 23. Measuring Labor-Market Discrimination  Because the differences in average wages among groups in part reflect differences in human capital and job characteristics, they do not by themselves say anything about how much discrimination there is in the labor market.
  • 24. Discrimination by Employers  Firms that do not discriminate will have lower labor costs when they hire the employees discriminated against.
  • 25. Discrimination by Employers  Nondiscriminatory firms will tend to replace firms that discriminate.
  • 26. Discrimination by Employers  Competitive markets tend to limit the impact of discrimination on wages.  Firms that do not discriminate will be more profitable than those firms that do discriminate.
  • 27. Discrimination by Customers and Governments  Although the profit motive is a strong force acting to eliminate discriminatory wage differentials, there are limits to its corrective abilities.  Customerpreferences  Government policies
  • 28. Discrimination by Customers and Governments  Customer preferences:  Ifcustomers have discriminatory preferences, a competitive market is consistent with a discriminatory wage differential.  This will happen when customers are willing to pay to maintain the discriminatory practice.
  • 29. Discrimination by Customers and Governments  Government policies:  When the government mandates discriminatory practices or requires firms to discriminate, this may also lead to discriminatory wage differentials.
  • 30. Summary  Workers earn different wages for many reasons.  To some extent, wage differentials compensate workers for job attributes.  Workers with more human capital get paid more than workers with less human capital.
  • 31. Summary  The return to accumulating human capital is high and has increased over the past decade.  There is much variation in earnings that cannot be explained by things economists can measure.
  • 32. Summary  The unexplained variation in earnings is largely attributable to natural ability, effort, and chance.  Some economists have suggested that more- educated workers earn higher wages because workers with high natural ability use education as a way to signal their high ability to employers.
  • 33. Summary  Wages are sometimes pushed above the equilibrium level because of minimum-wage laws, unions, and efficiency wages.  Some differences in earnings are attributable to discrimination on the basis of race, sex, or other factors.  When measuring the amount of discrimination, one must correct for differences in human capital and job characteristics.
  • 34. Summary  Competitive markets tend to limit the impact of discrimination on wages.  Discrimination can persist in competitive markets if customers are  willing to pay more to discriminatory firms,  or if the government passes laws requiring firms to discriminate.