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Chapter 19

Chapter 19 - Earnings and Discrimination.pdf

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Enrico Moretti

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Chapter 19: Earnings and Discrimination • must go beyond this general framework of supply and demand to discover variations in income • explore more precisely what determines the supply and demand for different types of labor I. Some Determinants of Equilibrium Wages • non-monetary attributes that affect income A. Compensating Differentials • compensating differential: a difference in wages that arises to offset the non-monetary characteristics of different jobs • e.g. coal miners are paid more than other workers with similar levels of education • compensates dirty and dangerous nature of job • e.g. workers who work night shift at factories are paid more than similar workers who work the day shift • compensates them for having to work at night and sleep during the day, a lifestyle that most find undesirable • e.g. professors are paid less than lawyers and doctors who have similar amounts of education • compensate them for the great intellectual and personal satisfaction that their jobs offer B. Human Capital • human capital: the accumulation of investments in people, such as education and on-the-job training • the most important type is education • tlike all forms of capital, education represents an expenditure of resources at one time to raise productivity in the future • those with more human capital earn more than those with less • why has the gap between unskilled and skilled workers widened in recent years? • Hypothesis 1: International trade has altered the relative demand for skilled and unskilled labor. • other countries have taken over unskilled labor, which causes an increase in demand for skilled labor domestically; this rise in demand causes wage increase • Hypothesis 2: Changes in technology have altered the relative demand for skilled and unskilled labor. • new technology is so complicated it requires more human capital to operate and therefore the demand for skilled labor increases and wages increase for them because fewer are educated C.Ability, Effort and Chance • some people are more prone to certain jobs • e.g. naturally smarter, height to play basketball • some companies pay on effort • e.g. many sales people are paid a percentage of their sales alongside their base salary D.AnAlternative View of Education: Signaling • earlier, discussed human-capital view of education; however alternative theory says educational attainment is a signal for firms to sort between high-ability and low-ability workers • e.g. person who earns college degree • do not necessarily become more productive • but degree signals their high ability to prospective employers • this is because it is easier for higher-ability people to get college degrees E. The Superstar Phenomenon • differences in ability lead to differences in income • however, doesn’t explain how some good people earn copious amounts of money • e.g. Johnny Depp • to understand tremendous incomes, must examine special features of the markets in which they sell their services • superstars arise in the market that have two characteristics: • every customer in the market wants to enjoy th
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