This document discusses factors that influence earnings, including human capital, education as a signal, compensating differentials, and discrimination. It provides examples of earnings differentials between graduates from top vs. lower ranked universities based on signaling theory and between high vs. low GPA graduates based on human capital theory. The document also examines earnings differences between more vs. less attractive individuals, hazardous waste vs. produce truckers, and the world's best writer vs. physical therapist based on productivity and compensation for risk. Charts show changes over time in the female-to-male wage ratio by occupation and factors explaining the gender wage gap.

1. Lecture PowerPoint® SlidesLecture PowerPoint® Slides
to accompanyto accompany
Prepared by
Marc Prud‘Homme, University of Ottawa 1

2. Chapter 19Chapter 19
Earnings and DiscriminationEarnings and Discrimination
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3. Human Capital
 Human capital: the accumulation of
investments in people
 Ex. education, on-the-job training
 On average, people with more human capital
earn more than those with less human capital.
 Education as a signal
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4. A C T I V E L E A R N I N G 1:
Discussion question
Suppose you were offered this choice:
A. You could spend 4 years studying at the world’s best
university, but you would have to keep your attendance
there a secret.
B. You could be awarded an official degree from the
world’s best university, but you couldn’t actually study
there.
Which do you think would enhance your future earnings
more?
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5. Earnings of University Graduates vs.
High-School Graduates
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6. Compensating Differentials
 Compensating differential: a different wage due
to non-monetary aspects of a job
 Other things equal, workers in hard/unpleasant jobs
get paid more than workers in easy/pleasant jobs
 A wage premium is paid to compensate workers for
exposing themselves to risk/danger
 Ex. workers in high-rise construction or electrical
linemen
 Wage difference due
to ability/heredity
6

7. Case Study: Good Looks Pay
 People deemed more attractive than average
earn 5% more than people of average looks; and
the average-looking people earn 5-10% more
than below-average looking people.
Why?
1. Good looks matter for productivity
2. Good looks indirectly related to ability
3. Discrimination
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8. The Superstar Phenomenon
 The best singer vs. the best plumber: which one
earns more?
 One can supply every customer at a low cost,
while the other cannot.
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9. In each case, identify which worker would earn more and
explain why.
A. The best physical therapist on the planet or
the best writer on the planet
B. A trucker that hauls produce or a trucker that hauls
hazardous waste from nuclear power plants
C. A graduate of a top college or an equally intelligent &
capable graduate from lower ranked university.
D. Someone who graduated from university with a 3.7
GPA, or someone who graduated from the same
university with a 2.4 GPA.
A C T I V E L E A R N I N G 2
Explaining wage differentials
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10. A. The best physical therapist on the planet or
the best writer on the planet
The superstar phenomenon:
The best writer can service many more customers
than the best physical therapist.
B. A trucker that hauls produce or a trucker that hauls
hazardous waste from nuclear power plants
Compensating differentials:
The hazardous waste hauler earns more to
compensate for the higher risks.
A C T I V E L E A R N I N G 2
Answers
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11. C. A graduate of a top college or an equally intelligent &
capable graduate from lower ranked university.
The signaling theory of education:
Employers assume the Ivy League grad has more ability
than the state university grad.
D. Someone who graduated from university with a 3.7 GPA,
or someone who graduated from the same university with
a 2.4 GPA.
The human capital theory of education:
A higher GPA reflects greater learning, which leads to
higher productivity and wages.
A C T I V E L E A R N I N G 2
Answers
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12. The Economics of Discrimination
 Discrimination: offering different
opportunities/rewards to similar individuals not on
the basis of productivity, but only due to personal
characteristics (race, ethnic group, sex, age etc.)
 But there are usually differences in productivity-
related characteristics as well:
Quantity of education
Quality of education
Labour market experience
Types of jobs
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13. Ratio of Female-to-Male Wages by
Occupation, 1997 and 2006
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14. Fraction of the Female-to- Male Wage
Gap Explained by Various Factors
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