Slide 1Economic InequalityWhy Do Wages Differ?An Imaginary WorldSlide 5Disappearing Wage DifferentialsSlide 7Compensating DifferentialsNonmonetary Job CharacteristicsSlide 10Slide 11Slide 12Cost of Living DifferencesDifferences in Human Capital RequirementsDifferences In AbilityThe Economics of SuperstarsSlide 17Barriers to EntryOccupational LicensingThe Market for PhysiciansUnion Wage SettingUnion Wage DifferentialsSlide 23The Minimum WageSlide 25Slide 26Slide 27Discrimination and WagesEmployer PrejudiceEmployee and Customer PrejudiceEmployer Discrimination and Wage RatesStatistical DiscriminationSlide 33Dealing With DiscriminationDiscrimination and Wage DifferentialsSlide 36Vicious Cycle of DiscriminationIncome InequalityThe Poverty RateThe Lorenz CurveThe U.S. Lorenz Curve, 2001Growing Income InequalitySlide 43Wealth InequalityU.S. Lorenz Cures for Income and Wealth, 2001Earned Income Versus Available IncomeIncome MobilitySlide 48Careless InterpretationsEconomic Inequality and FairnessSlide 51Using the Theory—CEOs in the 1990s and early 2000s: Ability…or Something Else?Using the Theory: The Ability ExplanationSlide 54Using the Theory: The Market Failure ExplanationSlide 56Slide 57Slide 58Slide 59Lecture by: Jacinto FabiosaFall 2005Economic Inequality2Economic Inequality•We live in a country with extreme differences in wealth and income•One reason for this is a difference in wage rates•Can explain much about wage differences, using the tools you learned in a previous chapter•To understand income inequality more broadly, must extend our reach beyond labor market –Look at earnings—or the lack of earnings—from all sources3Why Do Wages Differ?•At any time, some of the wage inequality we observe is short-run inequality•But long-run wage inequality exists as well–Differences in wages that persist after all adjustments have taken place•Significant inequality exists in wage rates –Among different occupations–Among and within occupations in U.S. labor market•Wage inequality is persistent•Both highest and lowest paid occupations have been so for decades4An Imaginary World•To understand why wages differ in the real world, let’s start by imagining an unreal world–Except for differences in wages, all jobs are equally attractive to all workers–All workers are equally able to do any job–All labor markets are perfectly competitive•In such a world, we would expect every worker to earn an identical wage in long-run5An Imaginary World•Figure 1 shows two different labor markets that initially have different wage rates–In our imaginary world, could this diagram describe long-run equilibrium in these markets? •No•As these shifts occur, market wage rate of elementary school teachers will rise and that of systems analysts will fall6Disappearing Wage DifferentialsNumber of Executive AssistantsHourly Wage LD20 A L1S(a)Number of CarpentersHourly Wage LD $30 B L1S(b) B L2S 26 L2SA $267An Imaginary World•When will the entry and exit stop? –When there is no reason for an elementary school teacher to want to be a systems analyst•When both labor markets are paying same wage rate•Long-run adjustments will occur even if no one actually switches jobs•Changes will continue until—at points A’ and B’—the long-run wage rate is equal in both markets•Take any one of these assumptions away, and equal-wage result disappears–Tells us where to look for sources of wage inequality in real world•A violation of one or more of our assumptions8Compensating Differentials•In our imaginary world, all jobs were equally attractive to all workers•In real world, jobs differ in hundreds of ways that matter to workers•When one job is intrinsically more or less attractive than another–Can expect wages to differ by a compensating wage differential•Difference in wage rates that makes two jobs equally attractive to workers9Nonmonetary Job Characteristics•When evaluating a career, whether you are aware of it or not, you are evaluating hundreds of nonmonetary job characteristics, including–Risk of death or injury–Cleanliness of work environment–Prestige you can expect in your community–Amount of physical exertion required–Degree of intellectual stimulation–Potential of advancement10Nonmonetary Job Characteristics•You will also think about geographic location of job and characteristics of the community in which you would live and work–Weather–Crime rates–Pollution levels–Transportation system–Cultural amenities•Nonmonetary characteristics of different jobs give rise to compensating wage differentials–Jobs considered intrinsically less attractive will tend to pay higher wages, other things being equal11Nonmonetary Job Characteristics•What about unusually attractive jobs?–These jobs will generally pay negative compensating differentials•Different people have different tastes for working and living conditions•Cannot use our own preferences to declare a job as less attractive or more attractive–Or to decide which jobs should pay a positive or negative compensating differential•Rather, when labor markets are perfectly competitive–Entry and exit of workers automatically determines compensating wage differential in each labor market12Nonmonetary Job Characteristics•Compensating wage differentials are one reason most economists are skeptical about idea of comparable worth–Holds that a government agency should determine skills required to perform different jobs and mandate wage differences needed between them•Economists generally prefer policies to increase competition and eliminate discrimination–So that the market itself can determine comparable worth13Cost of Living Differences•Differences in living costs can cause compensating wage differentials–Areas where living costs are higher than average will tend to have higher than average wages•To compensate for the higher cost of living14Differences in Human Capital Requirements•All else equal, jobs that require more education and training will be less attractive–In order to attract workers, these jobs must offer higher pay than other jobs that are similar in other ways, but require less training•Differences in human capital requirements can give rise to compensating wage differentials–Jobs that require more costly training will tend to pay higher wages, other things equal•Compensating differentials explain much of the wage differential
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