Slide 0In this chapter, look for the answers to these questions:U.S. Median Weekly Earnings, Selected Occupations, 2005IntroductionCompensating DifferentialsAbility, Effort, and ChanceSlide 7Case Study: The Benefits of BeautySlide 9The Superstar PhenomenonHuman CapitalWeekly Earnings of Full-Time Employed Persons Age 25+ by Education, 2005The Increasing Value of SkillsSlide 14A C T I V E L E A R N I N G 1: Discussion questionThe Signaling Theory of EducationReasons for Above-Equilibrium WagesSlide 18A C T I V E L E A R N I N G 2: Explaining wage differentialsA C T I V E L E A R N I N G 2: AnswersSlide 21The Economics of DiscriminationMeasuring Labor-Market DiscriminationSlide 24Slide 25Discrimination by EmployersSlide 27Discrimination by ConsumersDiscrimination by GovernmentsCONCLUSIONCHAPTER SUMMARYSlide 32Slide 33© 2007 Thomson South-Western, all rights reservedN. G R E G O R Y M A N K I WPowerPoint® Slidesby Ron Cronovich Earnings and DiscriminationEarnings and Discrimination19P R I N C I P L E S O FF O U R T H E D I T I O NCHAPTER 19 EARNINGS AND DISCRIMINATION2In this chapter, look for the answers to these questions:How do wages compensate for differences in job characteristics?Why do people with more education earn higher wages? Why are wages sometimes above their equilibrium values? Why is it difficult to measure discrimination? When might the market solve the problem of discrimination? When might it not?U.S. Median Weekly Earnings, Selected Occupations, 2005occupationboth sexesmen womengender gapChief executives $1,834 $1,903 $1,413 34.7%Aircraft pilots 1,366 1,368 n.e.d.Educ. administrators 1,114 1,289 972 32.6%Fire fighters 944 952 n.e.d.Registered nurses 935 1,011 930 8.7%Social workers 700 780 682 14.4%Secretaries 562 654 559 17.0%Telemarketers 367 n.e.d. 360 Waiters/waitresses 352 384 332 15.7%Maids/housekeeping 335 390 328 18.9%n.e.d. = not enough data for BLS disclosure requirements3CHAPTER 19 EARNINGS AND DISCRIMINATION4IntroductionIn competitive markets, the wages workers earn equal the value of their marginal products. There are many factors that affect productivity and wages…CHAPTER 19 EARNINGS AND DISCRIMINATION5Compensating DifferentialsCompensating differential: a difference in wages that arises to offset the nonmonetary characteristics of different jobsThese characteristics include unpleasantness, difficulty, safety. Examples:•Coal miners and fire fighters are paid more than other workers with similar education to compensate them for the extra risks.•Night shift workers paid more than day shift to compensate for the lifestyle disruption of working at night.CHAPTER 19 EARNINGS AND DISCRIMINATION6Ability, Effort, and ChanceGreater ability or effort often command higher pay, as these increase workers’ marginal products, make them more valuable to the firm.Wages also affected by chance•e.g., new discoveries that no one could have predicted make some occupations obsolete, increase demand in othersCHAPTER 19 EARNINGS AND DISCRIMINATION7Ability, Effort, and ChanceAbility, effort, and chance are difficult to measure, so it is hard to quantify their effects on wages. They are probably important, though, since easily measurable characteristics (education, age, etc.) account for less than half of the variation in wages in our economy.CHAPTER 19 EARNINGS AND DISCRIMINATION8Case Study: The Benefits of BeautyResearch by Hamermesh and Biddle:•People deemed more attractive than average earn 5% more than people of average looks. •Average-looking people earn 5-10% more than below-average looking people.CHAPTER 19 EARNINGS AND DISCRIMINATION9Case Study: The Benefits of BeautyHypotheses:Good looks matter for productivity•In jobs where appearance is important, attractive workers are more valuable to the firm, command higher pay.Good looks indirectly related to ability•People who make an effort to project attractive appearance may be smarter or more competent in other ways.DiscriminationCHAPTER 19 EARNINGS AND DISCRIMINATION10The Superstar PhenomenonSuperstars like Tom Cruise, U2 earn many times more than average in their fields.The best plumbers or carpenters do not. Superstars arise in markets that have two characteristics:•Every customer in the market wants to enjoy the good supplied by the best producer.•The good is produced with a technology that allows the best producer to supply every customer at a low cost.CHAPTER 19 EARNINGS AND DISCRIMINATION11Human CapitalHuman capital: the accumulation of investments in people, such as education and on-the-job training Human capital affects productivity, and thus labor demand and wages.Weekly Earnings of Full-Time Employed Persons Age 25+ by Education, 2005Educational attainmentMedian weekly earningsLess than H.S. $ 409H.S. diploma 583Some college or Associate degree670Bachelor’s degree 937Advanced degree 1,17312CHAPTER 19 EARNINGS AND DISCRIMINATION13The Increasing Value of SkillsWomenMen71%82%200335%44%1980Percentage difference in annual earnings for college graduates vs. high school diplomaThe earnings gap between college-educated and non-college-educated workers has widened in recent decades.CHAPTER 19 EARNINGS AND DISCRIMINATION14The Increasing Value of SkillsTwo hypotheses:1. International tradeRising exports of goods made with skilled labor, rising imports of goods made with unskilled labor. 2. Skill-biased technological changeNew technologies have increased demand for skilled workers, reduced demand for unskilled workers. Difficult to determine which hypothesis better explains the widening earnings gap; probably both are important.AA CC TT II VV E LE L EE AA RR NN II NN G G 11: : Discussion questionDiscussion questionSuppose you were offered this choice:A. You could spend 4 years studying at the world’s best university, but you would have to keep your attendance there a secret.B. You could be awarded an official degree from the world’s best university, but you couldn’t actually study there. Which do you think would enhance your future earnings more?15CHAPTER 19 EARNINGS AND DISCRIMINATION16The Signaling Theory of EducationAn alternative view of education:Firms use education level to sort between high-ability and low-ability workers. The difficulty of earning a college degree demonstrates to prospective employers that college graduates are highly capable.