1. Principles of Microeconomics
PowerPoint Presentations for
Principles of Microeconomics
Sixth Canadian Edition
by Mankiw/Kneebone/McKenzie
Adapted for the
Sixth Canadian Edition by
Marc Prud’homme
University of Ottawa

2. Earnings and discrimination
Chapter 19
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3. Earnings and discrimination
The goal of the chapter is to understand the wide variation in earnings that we observe.
The general framework of the theory of the labour market presented in Chapter 18 must be expanded.
The determinants of the supply and demand for different types of labour will be examined more closely here.
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4. SOME DETERMINANTS OF EQUILIBRIUM WAGES
How the characteristics of workers and jobs affect labour supply, labour demand, and equilibrium wages is examined here.
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5. Compensating Differentials
Compensating differential: a difference in wages that arises to offset the nonmonetary characteristics of different jobs
Economists use the term compensating differential to refer to a difference in wages that arises from nonmonetary characteristics of different jobs. Compensating differentials are prevalent in the economy.
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6. Compensating Differentials
Examples of compensating differentials:
Coal miners are paid more than other workers with similar levels of education.
Workers who work the night shift at factories are paid more than similar workers who work the day shift.
Professors are paid less than lawyers and doctors, who have similar amounts of education.
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Human Capital
Human capital: the accumulation of investments in people, such as education and on-the-job training
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Human Capital
Workers with more human capital on average earn more than those with less human capital.
University graduates in Canada, for example, earn about 60 percent more than workers who end their education with a high-school diploma.
The difference in wages between highly educated workers and less educated workers may be considered a compensating differential for the cost of becoming educated.
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FIGURE 19.1: Ratio of Earnings of Male University Graduates to Male High-School Graduates, 1980–2007
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10. Ability, Effort, and Chance
Natural ability and many other personal characteristics determine how productive workers are and therefore play a role in determining the wages they earn.
Workers who work hard are more productive and earn higher wages.
Chance also plays a role in determining wages.
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Case Study The Benefits of Beauty
Hamermesh and Biddle found that beauty pays.
People who are deemed to be more attractive than average earn 5 percent more than people of average looks.
People of average looks earn 5 to 10 percent more than people considered less attractive than average.
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12. An Alternative View of Education: Signalling
The human-capital view of education: Schooling raises workers’ wages because it makes them more productive.
Alternative theory: Firms use educational attainment as a way of sorting between high-ability and low- ability workers.
When people earn a college or university degree, they do not become more productive, but they do signal their high ability to prospective employers.
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13. The Superstar Phenomenon
Superstars arise in markets that have two 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 low cost.
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14. Above-Equilibrium Wages
For some workers, wages are set above the level that brings supply and demand into equilibrium.
Three reasons for this:
Minimum-wage laws
Market power of labour unions
The theory of efficiency wages
A union is a worker association that bargains with employers over wages and working conditions. Unions often raise wages above the level that would prevail without a union, perhaps because they can threaten to withhold labour from the firm by calling a strike. Studies suggest that union workers earn about 10 to 20 percent more than similar nonunion workers. Efficiency wages are above-equilibrium wages paid by firms in order to increase worker productivity
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Define compensating differential and give an example.
Give two reasons why more-educated workers earn more than less-educated workers.
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16. THE ECONOMICS OF DISCRIMINATION
Discrimination: the offering of different opportunities to similar individuals who differ only by race, ethnic group, sex, age, or other personal characteristics
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17. Measuring Labour-Market Discrimination
The average wage of female workers is about 80 percent of the average wage of male workers.
Studies have found that Aboriginal people living off reserves earn about 10 percent less than non-Aboriginal people.
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18. Measuring Labour-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 labour market.
Video: Do Women Earn Less than Men?
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19. Discrimination by Employers
If one group in society receives a lower wage than another group, even after controlling for human capital and job characteristics, who is to blame for this differential?
Some economists believe that competitive market economies provide a natural antidote to employer discrimination.
That antidote is called the profit motive.
Imagine an economy in which workers are differentiated by their hair colour. Blondes and brunettes have the same skills, experience, and work ethic. Yet, because of discrimination, employers prefer not to hire workers with blonde hair. Thus, the demand for blondes is lower than it otherwise would be. As a result, blondes earn a lower wage than brunettes. How long can this wage differential persist? In this economy, there is an easy way for a firm to beat out its competitors: It can hire blonde workers. By hiring blondes, a firm pays lower wages and thus has lower costs than firms that hire brunettes. Over time, more and more “blonde” firms enter the market to take advantage of this cost advantage. The existing “brunette” firms have higher costs and, therefore, begin to lose money when faced with the new competitors. These losses induce the brunette firms to go out of business. Eventually, the entry of blonde firms and the exit of brunette firms cause the demand for blonde workers to rise and the demand for brunette workers to fall. This process continues until the wage differential disappears.
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Case Study Explaining the Gender Wage Gap
Table 19.1: Ratio of Female-to-Male Wages by Occupation, 1997 and 2010
Table 19.1 illustrates ratios of female-to-male wages in Canada by selected occupation groups for 1997 and Over all occupations, the ratio increased slightly from 1997 to 2010, from 83 to 87. This was also true, for the most part, for different occupations. There was also quite a bit of variation across occupations, with a low of 76 in construction in 2010 and a high of 96 in clerical occupations. As discussed previously, unadjusted (gross) data can be misleading. The size and variability of the earnings gap across age groups, educational levels, and occupations suggest that many factors are at work, and it is important to attempt to identify and control for those factors. Economists typically do this by using data on individual workers and accounting for individual characteristics that would be expected to influence earnings: education, experience, occupation or industry, hours of work, and so on. Statistical techniques are then used to divide the gross female–male earnings gap into two components: the part that is explained by differences in individual worker characteristics, and the part that is unexplained. The unexplained component is typically attributed to discrimination.
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Case Study Explaining the Gender Wage Gap
Table 19.2 Fraction of the Female-to-Male Wage Gap Explained by Various Factors
An example of this approach, based on a Statistics Canada study, is shown in Table This table shows the percentage of the female–male wage gap that is explained by differences in various worker characteristics and the percentage that is then left unexplained. Fifty-one percent of the wage gap is unexplained and could therefore be attributed to discrimination of some kind. Of the factors that help to explain the wage gap, the most important are the industry that a person works in, the person’s occupation, and his or her full-year, full-time equivalent (FYFTE) on-the-job experience.
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22. Discrimination by Customers and Government
The profit motive is a strong force acting to eliminate discriminatory wage differentials, but there are limits to its corrective abilities.
Two of the most important limits of the profit motive:
Customer preferences
Government policies
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Why is it hard to establish whether a group of workers is being discriminated against?
Explain how profit-maximizing firms tend to eliminate discriminatory wage differentials.
How might a discriminatory wage differential persist?
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Active Learning Discussion Question
Suppose you were offered this choice:
A. You could spend four 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?
This discussion question anticipates the signalling theory of education, discussed next…
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Classroom Activity
Even Money
Consider replacing the current Canadian economic system with a system where everyone is paid exactly the same salary. Assume that each family would receive an equal share of GDP. For a typical four-person household, this would be more than $
Would you personally favour this system? Explain.
What problems would exist?
What mechanisms could be enacted to overcome these problems?
Who would benefit from this system?
What jobs would be hard to fill?
Activity 1–Even Money
Type: In-class assignment
Topics: Incentives, distribution of income
Materials needed: None
Time: 20 minutes
Class limitations: Works in any size class
Purpose: This assignment explores labour market issues by looking at an artificial situation of complete equality. Notions of incentives and job differences are explored. This usually provokes lively discussion, particularly if the proposal is presented as a realistic alternative.
Instructions: Have the class answer the following questions. Give them time to write an answer to a question, then discuss their answers before moving to the next question. Ask the students to consider replacing the current Canadian economic system with a system where everyone is paid exactly the same salary. Assume that each family would receive an equal share of GDP. For a typical four-person household, this would be more than $
1. Would you personally favour this system? Explain.
2. What problems would exist?
3 .What mechanisms could be enacted to overcome these problems?
4. Who would benefit from this system?
5. What jobs would be hard to fill?
 Common Answers and Points for Discussion
 1. Would you personally favour this system? Explain. Most students oppose a completely egalitarian distribution of income. Some expect to earn more under the existing system. Others see a variety of problems that make equality unworkable. Others simply see it as “un-Canadian.”
2. What problems would exist? Numerous problems exist. National Income may fall if the incentives to work are changed drastically. People may not work at all. Others may put forth less work effort. Unpleasant jobs are unlikely to be completed. Everyone would want a fun job. New inventions and technological advance could be hindered. Saving and investment and investment rates would be low. Education would become unimportant. Immigration rates could increase.
3. What mechanisms could be enacted to overcome these problems? Income could still be denied to people who did not work, and workers could still be fired for inadequate effort. Households could be required to participate in the labour force. Unpleasant jobs could be modified to improve safety, sanitation, or difficulty. Shorter hours could be assigned to those performing the least desirable work. In short, a complete set of alternative incentives would have to be developed. These incentives become increasingly complex as more and more aspects of the price system are replaced.
4. Who would benefit from this system? A vast majority of households would gain (in the short run, if the system worked) since the median household income is so much lower than an equal share of GDP.
5. What jobs would be hard to fill? Students break into two groups on this question. Many see the undesirable jobs as menial, rote, unsafe, or unclean. Slaughterhouses, garbage disposal, and assembly-line work are frequent examples. A relevant follow-up question is: “Why would these jobs be hard to fill at $90,000 a year, when people currently work these jobs for much lower wages?” Another group of students think professional jobs would be undesirable. Doctors, lawyers, and executives are their examples. Ask them, “Are these jobs worse than sucking the guts out of a dead chicken? These jobs seem to have better working conditions, high levels of personal autonomy, and some interesting challenges. Are people in these jobs motivated by more than money?” Looking at the best jobs, many students seem to feel the ultimate “fun job” would be in professional sports. Ask them why these workers need to receive millions of dollars in compensation. This assignment can be used to introduce a number of topics, such as market allocation of resources, distribution of income, risk premiums, compensating differentials, and returns to human capital.
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The end
Chapter 19
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