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Chapter 19

Chapter 19 Economics.docx

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Economics 10a
Gregory Mankiw

Chapter 19 Economics: Earnings and Discrimination • Compensating differential: a difference in wages that arises to offset the nonmonetary characteristics of different jobs (dangerous, dirty, night shift) o Adifference in wages can be explained by natural ability, effort (paid by commission), and chance (if a skill becomes obsolete) o Wages are based on variables (though the measured variables like schooling, years of experience, age, etc.), but they account for less than half of the variation in wages in our economy • Human capital: the accumulation of investments in people, such as education and on-the-job training (i.e. education) o Education raises wages because highly educated workers have higher marginal products (more productive)  Signaling theory: Firms use educational attainment as a way of sorting between high-ability and low-ability workers (wages are correlated with natural ability)raising all workers education levels would not enhance wages • The demand for skilled labor (and thus the wages) have risen over time, leading to greater inequality • Changes in technology have altered the relative demand for skilled and unskilled labor • International trade has altered the relative demand for skilled and unskilled labor o The U.S. tends to import goods produced with unskilled labor and export goods produced with skilled labor • When international trade expands, the domestic demand for skilled labor rises, and the domestic demand for unskilled labor falls • Beauty paysbecause it indirectly measures other types of ability, type of discrimination, and a type of innate ability • Superstar effect: superstars arise in markets that have two characteristics o Every customer in the market wants to enjoy the good supplied by the best producer o The good is produced with a technology that makes it possible for the best producer to supply every customer at low cost • Wages are not always based on the equilibrium model of the labor marketwages should
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