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Chapter 19

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Peter Sinclair

EC120 Chapter 19: Earnings and Discrimination Week 12 Some Determinants of Equilibrium Wages -Jobs have many differing characteristics – both in terms of the wage they pay and in terms of their nonmonetary attributes Compensating Differentials -When a worker is deciding to take a job, the wage is only one of many job attributes that the worker takes into account -Some are fun and some are dull -The better the job is gauged by these nonmonetary characteristics, the more people there are who are willing to do the job at any given wage -To induce people to take the ‘crappier’ jobs they have to give them a higher wage -Compensating differential-a difference in wages that arises to offset the nonmonetary characteristics of different jobs Human Capital -Human capital-the accumulation of investments in people, such as education and on-the-job training -An investment in education is tied to a specific person, and this linkage is what makes it human capital -Workers with more human capital, earn more -The difference in wages between highly educated workers and less educated workers may be considered a compensating differential for the cost of becoming educated Ability, Effort, and Chance -Players in the NHL earn more just because they have greater natural ability -Natural ability is important for workers in all occupations -Some people are outgoing and some people are awkward -Some people work hard, some people are lazy -Chance plays a role as technology changes. You become skilled in a Motorola razr and it becomes obsolete. -Ability, effort, and change are hard to measure -Indirect evidence suggests that they are important -When labour economists study wages, they relate a worker’s wage to those variables that can be measured – years of schooling, years of experience, age, and job characteristics. Although, all of these measured variables affect a worker’s wage as theory predicts, they account for less than half of the variation in wages in our economy. Because so much of the variation in wages is left unexplained, omitted variables, including ability, effort, and chance, must also play an important role An Alternative View of Education: Signalling -Firm use educational attainment as a way of sorting between high-ability and low-ability workers -According to this view when people earn an university degree, they do not become more productive but they do signal their high ability to prospective employers -We have two views on education: the human-capital theory and the signalling theory -According to the signalling view, education does not enhance productivity, so raising all worker’s educational levels would not affect wages -The truth lies somewhere between these two extremes EC120 Chapter 19: Earnings and Discrimination Week 12 The Superstar Phenomenon -People vary in ability and effort, and these differences lead to differences in income -Superstars arise in markets that have two characteristics: 1. Every customer in the market wants to enjoy the good supplied by the best producer 2. The good is produced with a technology that makes it possible for the best producer to supply every customer at low cost -It is possible for everyone to enjoy the singing of Usher -This is why there is no superstar carpenters and plumbers -Everyone prefers to employ the best carpenter, but a carpenter, unlike a musician, can provide his services to only a limited number of customers Above-Equilibrium Wages: Minimum-Wage Laws, Unions, and Efficiency Wages -Wages are assumed to adjust to balance labour supply and labour demand -One reason for above-equilibrium wage laws is minimum wage laws -A second reason
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