1. Next page Chapter 8: The Wage Structure

2. Jump to first page 1. Perfect Competition: Homogenous Workers and Jobs

3. Jump to first page Homogenous Workers and Jobs Assume that the wage of $10 in submarket a is higher than the wage in other submarkets. Assuming that jobs and workers are homogenous and information and mobility is costless, workers will leave the other submarkets for higher paying submarket a. The equilibrium wage rate will decrease in submarket a and rise in the other submarkets until the wage rate is the same in all submarkets ($8). Quantity of Labor Hours Wage rate S 0a D 0a Q0Q0 $10 S 1a Q1Q1 $8 This will decrease the labor supply in the other submarkets and increase the labor supply in submarket a (S 0 to S 1 ).

4. Jump to first page 2. The Wage Structure: Observed Differential

5. Jump to first page Hourly Earnings By Occupational Group, 2003 Occupational GroupHourly Wage Management, Business, And Financial$26.24 Installation, Maintenance, And Repair17.14 Sales Workers15.89 Office and Administrative Support13.73 Service Workers10.96 Farming, Fishing, And Forestry9.81

6. Jump to first page Hourly Earnings By Industry Group, 2003 Industry GroupHourly Wage Finance, Insurance, Real Estate,$20.99 Public Administration20.22 Mining19.81 Transportation, Warehousing, Information, and Utilities 19.27 Manufacturing18.51 Construction17.31 Services16.53 Retail Trade13.21

7. Jump to first page Private Manufacturing Worker’s Hourly Earnings By State, 2003 StateHourly Wage Connecticut$23.13 New Jersey22.91 Massachusetts21.44 New York19.09 Pennsylvania18.26 Ohio18.12 Texas17.53 Arkansas14.77 Mississippi13.80

8. Jump to first page 3. Wage Differentials: Heterogenous Jobs

9. Jump to first page n Compensating wage differentials consist of extra pay that an employer must provide a worker for some undesirable job characteristic that does not exist in alternative employment. u The wage differential is caused by a decreased labor supply for the job that has the undesirable job characteristic and an increased labor supply for the alternative employment. Compensating Differentials

10. Jump to first page n Sources of compensating differentials u Risk of job injury or death F Riskier jobs pay higher wages u Fringe benefits F Jobs with greater fringe benefits pay lower wages u Job status F Jobs with greater prestige pay lower wages Compensating Differentials

11. Jump to first page u Job location F Cities with greater amenities pay lower wages. F Cities with greater cost of living pay higher nominal wages. u Job security F Jobs with greater job security pay lower wages. u Prospect of wage advancement F Jobs with greater wage advancement have lower starting wages. Compensating Differentials

12. Jump to first page u Extent of control over the work place F Jobs with less personal control over the workplace and less flexible work hours pay higher wages. Compensating Differentials

13. Jump to first page n Jobs that require more education and training will pay a higher wage rate than those that do not. u The wage difference between skilled and unskilled workers is called the skill differential. n Skill differentials can increase, decrease, or reverse wage differences caused by compensating differentials. u Example: Nurses earn more than ditch diggers Differing Skill Requirements

14. Jump to first page n Shirking model u Firms will pay above-market wages where it is costly to monitor employee performance or the employer’s cost of poor performance is high. n Turnover model u Firms will pay above-market wages when hiring and training costs are high. n Empirical evidence u There is mixed empirical evidence. Efficiency Wage Payments

15. Jump to first page n Union status u Union workers earn more than nonunion workers. F Most of the differential is an economic rent to union workers. n Discrimination u Discrimination against women and minorities exists in some markets and creates wage differentials. Other Job or Employer Heterogeneities

16. Jump to first page n Firm size u Large firms pay higher wages than small firms. F Large firms are more likely to be unionized. F Workers at large firms may be more productive Training, better workers, greater capital F Higher wages may be a compensating wage differential. Other Job or Employer Heterogeneities

17. Jump to first page 4. Wage Differentials: Heterogenous Workers

18. Jump to first page n Individuals differ in the type, amount, and quality of their human capital. u The result is the labor force consists of noncompeting groups of workers that are not easily substitutable for each other. u In the short run, these differences in human capital generate wage differentials. u In the long run, the wage differentials cause individuals to move to higher paying jobs to some extent. NonCompeting Groups

19. Jump to first page n Differences in time preferences u Persons who are presented-oriented (i.e., have a high discount rate) are not willing to sacrifice present consumption without a large increase in future income. u Persons who are future-oriented (i.e., have a high discount rate) are willing to sacrifice present consumption for a small increase in future income. u Persons with lower discount rates acquire more human capital and thus create wage differentials. Differing Preferences

20. Jump to first page n Differences in tastes for nonwage aspects of jobs u People have different preferences for job security, location, and risk. u These differences in preferences create wage differentials Differing Prefences

21. Jump to first page n Married males earn 8 to 40% more than single males. n Possible explanations: u Differing personal attributes. F Characteristics such as personality and reliability enhance the probability of being married and also increase one’s wage. u Greater incentive to acquire human capital. F Need to help support a family Married vs Single Males

22. Jump to first page u Lower cost to acquire human capital. F Face a lower interest rate and wives can help finance education. n Mixed evidence u One study finds that marriage makes men more productive. F The marriage premium grows with years married. u Other studies find that differing personal attributes explain the wage differential. Married vs Single Males

23. Jump to first page Questions for Thought: 1. Discuss: “Many of the lowest-paid people in the society—for example, short-order cooks– also have relatively poor working conditions. Hence, the theory of compensating wage differentials is disproved.” 2. Explain why “pay comparability” legislation requiring that the public sector remunerate government employees at wages equal to private- sector counterparts might create excess supplies of labor in public-sector labor markets.

24. Jump to first page 5. The Hedonic Theory of Wages

25. Jump to first page Indifference Map The “hedonic” indifference map is composed of a number of indifference curves. Nonwage amenity (job safety) Wage Rate I1I1 I2I2 I3I3 Each individual curve shows the various combinations of wage rates and a particular nonwage amenity (for example job safety) that yield a specific level of total utility. Each curve to the northeast reflects a higher level of total utility. A steep curve implies that the person is risk averse—it takes a large increase in the wage rate to compensate for a small reduction in job safety.

26. Jump to first page Isoprofit Curve Nonwage amenity (job safety) Wage Rate P The employer’s isoprofit curve shows the various combinations of wage rates and a particular nonwage amenity (for example job safety) that yield a given level of total profit. Competition among firms will result in only normal profits (zero economic profit) in the long run. Firms will have to make their wage rate-job amenity decisions along a curve such as P. The isoprofit curve gets steeper with higher levels of job safety since it gets more and more expensive to increase job safety. Firms differ in their ability to increase job safety and thus have different isoprofit curves.

27. Jump to first page Matching The slope of isoprofit curve P A is less steep than curve P B,which implies the marginal cost of job safety is more expensive at firm B than at firm A. Workers maximize utility by being tangent to the highest possible isoprofit curve. The risk averse worker will work for the firm able to raise safety at low marginal cost. The worker will get wage W A and safety S A. Indifference curve I A is steeper than curve I B which implies that person A is more risk averse than person B. The risk loving worker will work for the firm able to raise safety at high marginal cost. The worker will get wage W B and safety S B. A SASA WAWA IBIB IAIA PAPA Nonwage amenity (job safety) Wage Rate PBPB B SBSB WBWB

28. Jump to first page n Workers with fewer nonwage amenities will get higher wages. n Laws with minimum safety standards may reduce utility of some workers. u Risk loving workers would prefer higher wages to greater safety. n Part of the male-female wage differential may reflect differences in preferences for nonwage amenities. u Women may prefer shorter commuting distances and safer jobs. Labor Market Implications

29. Jump to first page n Workers with strong preferences for fringe benefits will match up with firms that can provide fringe benefits at low cost. u Cafeteria plans which allow workers to choose from a variety of fringe benefits allow workers to get higher utility since they are not forced to accept a fixed bundle. Labor Market Implications

30. Jump to first page 6. Wage Differentials: Labor Market Imperfections

31. Jump to first page Wage Rate Distributions If information and job search is costly, then a single equilibrium wage for a specific occupation is not likely to occur. A range of possible wages will exist for an occupation. These wage differentials will not cause job switching since the expected marginal benefits of the higher wage are exceeded by the expected marginal cost of obtaining the information. In this example, 20 percent of workers will earn between $6.80 and $6.99 per hour. However, 5% of the workers will earn between $6.00 and $6.19, while another 5% will earn between $7.60 and $7.79.

32. Jump to first page Lengthy Adjustment Period An increase in labor demand initially may cause a substantial wage increase to W 0 in occupations with lengthy training periods. For a time the wage rate may oscillate above and below the long-run equilibrium wage rate W e before equilibrium in the market is finally restored. But the supply response to higher wage may create surplus of labor to the occupation in the next period, driving the wage rate lower to W 1. During the transition periods, wage differentials between this occupation and others paying W e will be observed. Units of Time Wage Rate W0W0 W1W1 W2W2 W3W3 WeWe WeWe

33. Jump to first page n Labor immobilities are impediments to the movement of labor and can cause wage differentials. n Geographic immobilties u Costs to moving can deter migration and thus permit wage differentials to exist across geographic areas. n Institutional immobilties u Restrictions on mobility imposed by the government or unions can deter mobility. F Occupational licensing, apprenticeships Immobilities

34. Jump to first page n Sociological immobilties u Race and gender discrimination will cause racial and gender wage differentials to exist. Immobilities

35. Jump to first page Questions for Thought: 1. Suppose that (a) employees must pay higher wages to attract workers from wider geographic areas and hence higher wages are associated with longer commuting distances (less of the amenity “closeness of job to home”) and (b) females have greater tastes for having jobs close to their homes than males. Use the hedonic wage model to show graphically why a male-female wage differential might emerge, independently of skill differences or gender discrimination.

36. Jump to first page End Chapter 8