1. To what extent can the “market” justify wage differences? An economics perspective Jenny Säve-Söderbergh, The Swedish Institute for Social Research, Stockholm University, Sweden

2. Overview  Why is the labor market not an ordinary market for goods or services?  Classical labor market model & Alternative models  When do we get different wages for different individuals?  When do we get different wages for identical individuals?  Discussion

3. The Labor Market – A Particular Market 1.Labor is a factor of production – not a finished product 2.Heterogeneous product 3.Service flow and a fixed equipment 4.Cannot be sold in parts – more risky 5.Difficulties measuring the quality 6.Regulated market

4. The classical Labor Market – Basic Assumptions and results  Supply and demand → market wage  Important assumption: Cost = marg.prod labor  Perfect competition –No employer can affect the wages! Efficient!  Monopsony: Employers affect the wages! Inefficient!

5. Why does the wage change?  Excess demand: due to a technological shock → employers are willing to pay more for labor  Excess supply, due to increased access to for example education → employees are willing to work for less

6. Alternative Theories  Efficiency wages: in the employer’s interest to pay higher wages than the market wage Why? A gift, less shirking, better selection.  Search theory: There is match- specific productivity between employers and employees. The larger the more to share. Wage bargaining.

7. Wage differences between different individuals  What is productivity? Can it be valued: Yes by the market! Determined by  individual characteristics: Education, experience, social skills  Job characteristics: responsibility, congestion, dirtiness,  Gives rise to a wage spread  Individual charac. and institutions

8. Changes in the wage spread Among groups  Demand for one group ↑, f. ex. a technological change  Supply of one group ↑, f. ex. educational policy  Changes in institutions Within groups  Product market deregulation– less possibility to discriminate, or trade unionization

9. Wage differences between similar individuals  Wage discrimination: an individual, or a group, receives a lower wage or remuneration due to a characteristic not related to the productivity  Becker (1957)  Employer discrimination, employee discrimination and customer discrimination

10. Discrimination  Important: It is costly to discriminate!!  If enough non-discriminatory employers, the discriminating employers will be competed away!  Statistical Discrimination! No preference for discrimination only lack of information!

11. Discussion and Implications  Measuring discrimination – average differences often bad measure  Equal Pay Act regulates two wage differences: equal wage for equal work and equal pay for comparable work: the latter most difficult!  What is comparable? Different markets must have different wages

12. Discussion and Implications  Wage setting in the public sector – market power – allowed?  Let discriminatory employers be competed away! Requires good information and no involuntary unemployment.  Not competed away if customer discrimination!  Wage legislation may be inefficient

13. Discussion and Implications  Conclusion: To evaluate wage discrimination compare:  individual characteristics,  job characteristics and  market conditions: supply, demand and institutions