Wage Rate Differentials 1

 Competitive labour markets:  Consider two markets with different wages  If there is a free access to a market with higher wage, a worker will move there. It would increase the wages in the low-wage market (because of a reduction in labour supply), and decrease the wages in the high-wage market (because of an increase in labour supply).  Yet we know there is non-trivial occupation wage structure.  There must be something that prevents the worker’s move from one occupation to another 2

 Factors to explain wage differentials:  Adjustment lag  So there is a change in some exogenous variable  The change shifts a curve in a market and leads to a new equilibrium  If the workers do not move immediately, wage differential exists for a while  This wage differential is temporary/transitional 3

 Labour market barriers:  Restrictions on mobility  We usually think regulation/law  Licence requirement  National border  But other things may work, too  Poor information about labour markets  Discrimination  Pre-market discrimination  Market discrimination  Detecting discrimination  Does discrimination make sense?  Geography  Language  Closed shop union  Government regulation  Education/training/licencing 4

 Compensating wage differentials  Jobs that stink  Risk of injury/illness  Stress  Wrong time shifts  Lifting heavy things  Risk of unemployment  Unpleasant environment  These produce compensating wage differentials  Jobs that are great  Opposite to bad  Flexible hours  Employment security  Long vacations  Status  Fringe benefits  These produce equalizing differences  It’s all relative  Can change within general equilibrium 5

 Personal characteristics  Heterogeneous workers  Education  Talent/ability  Are they ever independent variables? 6

 Discrimination  Is male-female discrimination real?  Part-time employment  Education  Experience  If all one can account for is accounted for, the answer is not clear  Statistical discrimination  In competitive markets, discrimination by employers cannot persist  It can persist in non-competitive markets  Regulations to preserve discrimination  Discrimination due to prejudice by workers may persist in any markets  Anti-discriminatory policies are consequential 7