Chapter 19, Earnings and Discrimination

Econ 11, Foldvary

The basic wage is based on the marginal product of labor.

Several things determine the productivity of labor, and other things alter the wage.

Why do wages vary so?

One reason is "compensating differentials."

These are non-wage utilities or disutilities.

A "compensating differential" (p. 419) means differences in wages due to characteristics of jobs.

A more dangerous or unpleasant type of work will have a lower supply of workers and therefore a higher wage. Night shifts, for example, are often paid a wage premium.

"Psychic income" is the satisfaction and enjoyment from labor.

High psychic income increases the supply of labor, reducing the wage.

Some jobs with high psychic income have lower wages.

Military pay is low even though dangerous because people join the military for reasons of patriotism, duty, discipline, security, family history, or they like the military lifestyle.

"Human capital" is the skills and knowledge that workers have.

Economic investment includes adding to human capital.

Human capital increases the productivity of labor.

A college degree can also help because it signals ability.

International trade and technological progress have increased the premium for skills.

Talent can also increase productivity. It gets higher wages because of the low supply.

Effort often gets higher rewards, such as higher salaries or as commission.

Chance - luck - connections


Minimum wage laws raise wages for some but at a cost of more unemployment.

Unions with compulsory membership restrict employment in the union sector, raising union wages. Labor is shifted to the non-union sector, where wages fall.

The outcome is neutral for wages, but negative for social welfare.

Efficiency wages: paying more to get less turnover and better performance.

This is not really an above-equilibrium wage; it is the equilibrium.

Arbitrary labor discrimination: offering different payments and opportunities to similar people.

Those discriminated against have a financial loss, but do they have a property right to a job?

Statistical patterns of wages do not necessarily imply discrimination.

There are different amounts of human capital and choice of jobs among different segments of the population. P. 431: difference small when equal human capital.

Comparable worth: equal pay for work of comparable quality.

How to measure?

Employers can discriminate arbitrarily when unemployment is high.

With full employment, it is costly to discriminate, and so there will be little or no discrimination.