ECON 208 Lecture Notes - Lecture 20: Marginal Revenue, Marginal Cost, Featherbedding

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ECON 208- Lecture 20- Chapter 14
14.1 Wage Differentials
In competitive labour markets, supply and demand set the equilibrium wage and level of
employment
No worker or firm is able to affect the market wage
In practice we have many kinds of workers and many kinds of jobs
 Series of labour markets with wage differentials
Wage Differentials in Competitive Markets
Reasons for wage differentials:
1. Working conditions (compensating differentials)
2. Inherited skills
3. Human capital (formal education, on the job training)
4. Discrimination
Temporary or Equilibrium Wage Differentials? (Chapter 13)
Wage differentials can be temporary or exist in long- run equilibrium
Labour mobility erodes temporary wage differentials
Ex: Consider an increase in demand for steel workers
Increase in their wage
Attracts workers from other industries
Wages then fall in steel industry and rise elsewhere
Differential is eventually eliminated
The Creation and Erosion of Temporary Wage Differentials
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Equilibrium differentials are not eliminated by factor mobility because neither workers nor
jobs are identical. Can be explained by:
1. Intrinsic differences in the workers themselves,
2. By differences in the cost of acquiring skills and
3. By the different non- monetary advantages of different occupations
Equilibrium factor- price differentials are also called compensating differentials
Working Conditions:
Risk and unpleasantness reduce the supply of labour, thus raising wage above what it
would be otherwise
Different working conditions in different jobs lead to compensating differentials
These wage differentials are not temporary, they are equilibrium wage differentials
Inherited Skills:
Large incomes will be earned by people who have scare skills that can not be taught and
that are in high demand (ex: NBA basketball players, opera singers, or movie stars)
High market clearing wage as a result of a small and inelastic supply curve and a large
enough demand
These wage differentials are not temporary, they are equilibrium wage differentials
Human Capital:
Investment in human capital is costly, and the return is usually in terms of higher future
wages
Formal education: Changes in labour market conditions alter the costs and benefits of
acquiring human capital. Individuals respond according to their personal assessment of
these costs and benefits
On the job training: Wage differentials according to experience are important in creating
rising wages fro employees and for making firms competitive
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