Chapter 19 - Earnings and Discrimination

Wages are determined by the labor supply and labor demand.
Equilibrium: each worker is paid relative to how much they contribute to creating the goods and services
However, there are still disparities.

19-1 Some Determinations of Equilibrium Wages

Workers all have their unique strengths. Therefore, jobs are also differentiated and assigned to workers who are best suited for the task.

Jobs can be differentiated by the work they take part in, but also by how dangerous they are and entertaining they are.
Jobs that are less dangerous and more entertaining would be more attractive to the market.
Jobs that are more dangerous and less entertaining are usually placed at a higher wage than the “fun” ones to make the offer more attractive.
Compensating differential: wage differences that are caused by non-monetary factors and characteristics

Capital: an economy’s stock of equipment and structures. A product that has been produced with the factors of production.
Human capital: accumulation of investments in people. The most common example of this is education.
Workers with more human capital (ex: education) will earn more than workers with less human capital.
People who hire will pay more with more educated workers because the workers have higher marginal products.
Future workers/workers will pay for colleges and other types of education if there is an incentive to do so.

Natural ability is important. If a worker is naturally better at a job, they will likely ascend the role hierarchy.
Similarly, if someone is a hard worker, they will be more productive and earn higher wages.
Bonuses are usually issued to these types of workers based on their performances. Others are paid a percentage of the sales they make. Either way, the more the workers produce, the more they can expect to receive in the form of cash or social incentives.
Chance can both negatively and positively affect wages. However, this phenomenon is not studied often due to its variability and how random it is.
Variation in wages is usually not explained by companies and corporations, but variables like ability, effort, and chance are usually most prevalent.

Higher education signals high ability. It is not a direct relationship (or cause) to higher productivity, but it is a signal.
Signals of abilities can often be seen in resumes, where workers’ experience and education are revealed.
This is similar to the signaling theory of advertising, where if a company is willing to spend money on advertising, the quality of the product must be worth that money.
Essentially, willingness to attend school is usually related to willingness to be more productive in a company.
According to the human-capital view, education makes workers more productive.
According to the signal theory of advertising, education signals the likelihood to be productive.
Both views explain why higher educated workers are paid more. It is very likely the “true” answer is a mix between these two views.

Usually prevalent in entertainment jobs like sports and movies, “superstars” are people who are good at entertaining.
Their job causes them to be broadcasted around the world, which is why they are paid more. They are able to draw in more customers than a plumber, or carpenter.

Sometimes, wages are above equilibrium. There are three potential reasons why this occurs:
A minimum wage mostly affects regulations of low-effort jobs.
The market power of labor unions, when left unsatisfied, can negatively affect a job.
- Union: a group of workers that makes deals with employers for fair wages and working conditions. If they are left very unhappy, they can call a strike.
- Strike: when a large group of workers refuses to work.
The theory of efficiency wage increases worker morale and productivity.
- Efficiency wages: when a firm pays high wages for workers to feel more motivated and make the workplace more attractive.
These above-equilibrium wages affect the market. It increases labor supplied and reduces labor demanded.

Discrimination: when the marketplace offers and rescinds opportunities to similar people, only differentiated by personal characteristics.

The median black man is paid 21% less than the median white man.
The median black woman is paid 15% less than the median white woman.
The median white woman is paid 20% less than the median white man.
The median black woman is paid 13% less than the median black man.
Employers, from these statistics, discriminate against blacks and women.
Even without discrimination, price differences are still vast due to the difference in jobs. So, just observing these statistics does not prove employers actively discriminate.
- In 2017, 34% of white Americans had a college degree. 24% of black Americans had a college degree. (ages >24)
- Public schools in predominantly black areas can be observed as being lower quality compared to public schools in predominantly white areas.s
- Women are also more likely to pause their jobs to raise children. Because of this, older women are likely to have less job experience.
- Men and women do not look for the same type of work, causing differences in pay.
Differences in human capital among groups of workers can show discrimination.
- Ex: certain groups of people are subject to a lesser curriculum.

Business owners may be tempted to hire discriminated workers because they are paid less. (Ex: women instead of men).
Because of this, women are wanted more than men, and their value begins to rise.
Eventually, the wage differential will disappear.

Customer preferences and government policies affect wages.
If consumers only care about quality and price, discrimination techniques will lessen as well as the wage differential.
If consumers discriminate, the wage differential will not disappear.
If the government actively encourages discrimination (ex: segregation) the wage differential will not disappear.

Statistical discrimination: employers do not have pinpoint accuracy on employees. Therefore, they use observable traits and stereotypes to estimate the best employee.
Employers prefer to not hire workers with criminal records because some of these people could be considered dangerous.

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