1. Which person would you expect to earn more 1. Which person would you expect to earn more? What are the major factors that would normally explain earnings differences between them? a. (1) a lawyer and (2) a minister, b. (1) an accountant and (2) a school teacher, c. (1) a business executive and (2) a social worker, d. (1) a country lawyer and (2) a Wall Street lawyer, e. (1) an experienced, skilled craftsperson and (2) a 20‑year‑old high school dropout, and, f. (1) an upper‑story & (2) a ground‑floor window washer?

2. Should the following people expect to get (1) higher or (2) lower wages? The employee must work the midnight to 8 am shift. The job involves broken intervals (work 3 hours, off 2 hours, work 3 additional hours, and so on) of employment during the day. The employer provides low-cost childcare services on the premises. The job is viewed as prestigious. The job requires employees to move often from city to city. The job requires substantial amounts of out-of-town travel

Earnings, Productivity, and the Job Market Why Do Earnings Differ? 1. Non-identical Workers 2. Non-identical Jobs 3. Immobility of Labor

Earnings Differentials: 1. Non-identical Workers Worker productivity: More productive more money Tournament pay Worker preferences: If money is most important, pursue jobs with higher wages. Race and gender: Discrimination.

Earnings Differences: Skilled and Unskilled Workers The wages of unskilled workers are low relative to skilled workers due to the less demand and large supply of skilled workers relative to unskilled workers. Wages Quantity Ds Ss Su Du Skilled workers face strong demand and small supply relative to unskilled workers. Ws Wu

Level of Education and Earnings (and Discrimination) Mean earnings ($) of year-round-full-time workers (2000) Men 24,595 Less than 9th grade 18,578 Women The earnings of both men and women increase with education. 35,121 High School 23,498 42,946 Some college 29,500 Note, though, that women’s earnings were only about 2/3 those of similarly educated men. 62,543 Bachelor’s degree 40,263 75,411 Master’s degree 49,635 107,988 Doctoral degree 69,085 56% of men’s

Level of Education and Earnings Mean earnings ($) of year-round-full-time workers (2001) Men 27,190 Less than high school 22,361 Women Updated in 2001 37,362 High school Both still increase with education. 26,660 45,271 Some college Women’s earnings still about 2/3 those of similarly educated men. 32,511 70,253 Bachelor’s degree 45,290 87,022 Master’s degree 57,770 118,853 10% above 2000 Doctoral degree 71,608 14% above 2000 66% of men’s

Level of Education and Earnings 4/23/2017 Level of Education and Earnings Mean earnings ($) of year-round-full-time workers (2005) Men 28,415 Less than high school 20,508 Women Updated in 2005 40,112 High school Both still increase with education. 28,657 49,537 Some college Women’s earnings still about 2/3 those of similarly educated men. 35,521 75,130 Bachelor’s degree 49,326 95,794 Master’s degree 59,569 136,567 14.9% from 2001 Doctoral degree 92,650 14.9% from 2001 47% of men’s

Level of Education and Earnings 4/23/2017 Level of Education and Earnings Men 30,602 Less than high school 21,906 Women Updated in 2007 42,042 High school The earnings of both men & women increase with education. 30,657 50,103 Some college 38,396 Women’s earnings still only about 2/3 those of similarly educated men. 77,536 Bachelor’s degree 52,857 94,763 Master’s degree 63,156 132,706 Doctoral degree 85,190

Comparison over time Bachelor’s Degree Men 2000 Women 2001 2005 2007 4/23/2017 Comparison over time 62,543 Men 2000 40,263 Women Bachelor’s Degree 70,253 2001 45,290 2005 75,130 49,326 77,536 2007 52,857

Earnings Differentials: 2. Non-Identical Jobs Undesirable working conditions = higher wages (compensating wage differentials). Compensating wage differentials factors: Job risk Job location Working hours Work environment

Earnings Differentials: 3. Immobility of Labor An incomplete adjustment to a change in labor demand because of labor immobility. Immobility can result from: Specialized labor – derived demand, so lags Institutional barriers Minimum wage – fewer workers hired Occupational licensing - restricted Labor unions - restricted

Discrimination 1. Wage Discrimination 2. Employment Discrimination Lower wages for minorities 2. Employment Discrimination Fewer jobs available for minorities

Wage Discrimination When majority workers are preferred to minority workers (or men to women), demand for minority workers is reduced. Minority workers receive lower wages.

Impact of Wage Discrimination Wages Employment discrimination causes the demand for minority services to decrease. S Dminorities Ww A The result is lower demand, and the equilibrium wage will be at a lower level, Ww > Wm . Wm B Dwhites Employment Qm Qw

Employment Discrimination Discriminated workers are restricted in the types of jobs and occupations they enter. Supply in the unrestricted jobs will increase, causing wages to fall in these jobs. When the supply (of minorities) to an occupation is restricted, the wages (of white males) will rise. Su Su Wages Wages Du Du Sr Sr Wr Wn Wn Wu Quantity Quantity

Employment Discrimination Discrimination is costly to employers. When employers can hire equally productive minorities (or women) at a lower wage than whites (men), the profit motive gives them a strong incentive to do so. Employers who ignore minority and gender status when employing workers will have lower wage costs than employers who discriminate.

Employment Discrimination and Earnings of Minorities Earnings may differ among groups for reasons besides employment discrimination. To measure the extent of employment discrimination, we must: Adjust earnings for differences between groups in productivity-related factors such as education Then make comparisons between similarly qualified groups of workers who differ only in race or gender.

The Actual and Productivity Adjusted Wages of Minorities Compared to Whites 2003-2006* Men Women Actual Adjusted Actual Adjusted White 100 100 100 100 African-American 79 86 90 94 American Indian 82 92 88 96 Asian-American 100 94 103 97 Mexican-American 67 93 75 98 Other Hispanic 79 92 85 95 * Data were supplied by David MacPherson, as derived from the Current Population Surveys (CPS). Data were adjusted for years of schooling, work experience, region, industry, sector of employment, union status, and marital status.

a Primarily Chinese-Americans and Japanese-Americans. 4/23/2017 The Actual and Productivity-Adjusted Wages of Minorities Compared to Whites 2003-2006* Men Women Actual Adjusted Actual Adjusted White 100 100 100 100 African-American 78 85 89 92 American Indian 82 95 85 98 Asian-American a 102 90 106 94 Mexican-American 64 88 72 94 Other Hispanic 75 87 83 91 a Primarily Chinese-Americans and Japanese-Americans. * Data were supplied by David MacPherson, as derived from the 2003-2006 Current Population Surveys (CPS). Data were adjusted for years of schooling, work experience, region, industry, sector of employment, union status, and marital status.

Productivity and Earnings Link Between Output and Earnings Productivity is the source of high wages. Workers in the U.S. earn high wages because their output per hour is high as a result of: Greater worker knowledge and skills (human capital) The use of modern machinery (physical capital)

Productivity and Earnings Annual rate of increase of productivity and real wages 3.2 % 2.8 % 2.9 % 2.0 % 1.5 % 0.7 % 1948–1973 1974–1995 1996–2006 Rise in output per hour (private business sector) Rise in real compensation (private business sector) Productivity & compensation per hour are closely related. Relative to the 1948-1973 period, growth in productivity and real wages slowed between 1973 and 1995. Both rebounded substantially during the 1996-2006 time frame.

Productivity and the New Economy Productivity rebounded significantly between 1996 and 2003 after being low for the prior 20 years. New Era view Proponents argue the increase in productivity growth is the result of increased amounts of information technology capital as well as a speedup in technological change. Temporary Factors Critics argue cyclical factors were responsible for the productivity growth.

Automation Automated methods of production will only be adopted if they reduce costs. Automation may reduce employment in a specific industry. It also releases resources that can be employed in other areas. Improved technology permits us to achieve larger output and income levels.

1. If all persons had identical preferences and productivity factors (ability, skill level, education, experience, etc.), the highest paying jobs would be the most a. prestigious. b. convenient. c. undesirable. d. easily learned. 2. Automated production methods are only attractive when they a. are undertaken in heavily unionized sectors of the economy. b. reduce per-unit costs. c. replace workers. d. decrease labor productivity. 3. The fact that some people will work hard to earn a lot of money while others will be content with much less income indicates that a. worker preferences are an important source of earning differentials. b. economics ranks one set of worker preferences as more desirable than another. c. some people can be paid less for doing hard work while others have to be paid a premium for doing a similar task. d. skill levels of laborers are a minor consideration in wage rate determination.

4. Which of the following is most likely to reduce the nominal market wage in a job category? a. The job requires employees to work from 11 p.m. to 7 a.m. b. The job is prestigious, and the work is quite interesting. c. The job is widely viewed as dangerous. d. The job requires employees to move from city to city quite often. 5. Wages in the United States are higher than those in India primarily because a. the weather is better in the United States. b. a larger proportion of the labor force is unionized in the US. c. less capital per employee is required in the United States. d. the human and physical capital of American workers exceeds that of their Indian counterparts. 6. Economic theory suggests that the standard of living of American workers would rise if a. the minimum wage were doubled. b. automation were outlawed. c. workers were forced to retire earlier. d. technological improvements increased output per worker-hour.

7. The earnings of all employees in a competitive economy would be equal if a. all individuals were homogeneous. b. all jobs were equally attractive. c. workers were perfectly mobile among jobs. d. all of the above are true. 8. When employment discrimination results from the personal prejudices of employers, economic theory suggests that a. it is costless for employers to discriminate against groups they do not like. b. the wages of employees who are discriminated against will actually rise. c. an employer who discriminates will experience higher costs. d. discrimination by an employer will reduce production costs since the employer can pay lower wages.

9. In a market economy, which of the following is most important if one is going to achieve high earnings? a. hard work b. provision of goods and/or services that others value highly c. having a graduate degree in a field like history or sociology d. membership in a labor union 10. “Both buyers and sellers are protected by market competition. Competition is the great regulator that protects consumers against high product prices (relative to costs) and productive workers against low wages.” These statements are a. essentially true. b. false; competition protects consumers but cannot protect workers. c. false; competition protects workers but cannot protect consumers. d. true, when consumer protection organizations are active and labor unions are powerful; otherwise, it is false.