Earnings, Productivity, and the Job Market

  1. Why Do Earnings Differ?

    Economic theory predicts that if (a) all individuals were homogeneous, (b) all jobs were equally attractive, and (c) workers were perfectly mobile among jobs, earnings of all employees in a competitive economy will be the same.

    1. Earnings differentials due to heterogeneous labor
      1. Demand for workers with higher productivity (higher marginal revenue product) will be higher than the demand for less productive workers.
        1. Worker productivity depends on:
          1. innate ability
          2. parental training
          3. hard work
          4. investments in human capital
        2. High skill is no guarantee of high wages--demand for that skill is also required.
      2. Worker preferences
      3. Race and sex discrimination
    2. Earnings differentials due to heterogeneous jobs
      1. Most jobs involve nonpecuniary characteristics. These are things like working conditions, prestige, variety, location, employee freedom, and other nonwage characteristics that influence how an employee evaluates his or her job.
      2. Compensating wage differentials are wage differences that compensate workers for risk and other unpleasant nonpecuniary job characteristics.
    3. Earnings differentials due to labor immobility
      1. Resources tend to be highly immobile in the short-run. An expansion in demand may cause the wage rates of specialized workers to rise sharply.
        1. Costs are involved in moving resources.
        2. Costs are involved in training new resources.
      2. Institutional barriers may prevent labor mobility (licensing and/or unionization)
  2. Economics of Discrimination
    1. There are basically two outlets for employment discrimination
      1. An individual belonging to a group that is being discriminated against may find employment, but only at a lower wage rate.
        1. The favored group finds a greater demand for their services.
        2. The employer must pay a premium for the services of individuals in the preferred group.
        3. If members of the two groups are equally skilled, then there is an incentive in competitive markets to hire the low cost (discriminated against) workers. Consequently, market forces penalize discriminatory practices and actually work to alleviate wage differential.
      2. An individual belonging to a group that is being discriminated against may not be able to find employment at all.
        1. These practices tend to force individuals belonging to nonfavored groups to be crowded into a small number of occupations. This will tend to keep wages low in the discriminated group and higher in the nondiscriminated group.
        2. Once again, competition works against exclusionary practices. Employers are penalized if they pay higher wages than necessary to the favored groups.
    2. Employment Discrimination and the Earnings of Women
  3. Economics of Fringe Benefits
    1. There are two basic forms of compensation
      1. Money Wages
      2. Fringe Benefits
    2. Employees pay for fringe benefits in the form of lower money wages. A fringe benefit is earned by the employee and is part of his or her total compensation package.
    3. Total compensation of an employee will reflect market conditions. An increase in mandated fringe benefits will be paid for by a reduction in money wages.
    4. When the employer's cost of providing a fringe benefit is low, and the employee's personal valuation of the benefit is high, employers and employees will find it mutually advantageous to substitute fringe benefits for money wages in the total compensation package. When this is not true, money wages tend to be the more efficient form of compensation.
  4. Productivity and the general level of wages
    1. Differences in labor productivity are the major source of variation in real wages between nations and between different time periods.
      1. Higher labor productivity usually means higher wages.
      2. Output and productivity are the sources of higher real wages and living standards.
        1. Worker productivity is enhanced by labor saving advances in technology. Machines enable more output per person. Although specific jobs may be eliminated, this causes human resources to be released which can be used to expand output in other areas.
        2. Worker productivity is enhanced by net investment in human capital.
    2. Great productivity slowdown
      1. Since 1973, the rate of productivity growth in the US has been only about half of what it was in the 1950s and 1960s
      2. Slowdown has occurred worldwide.
      3. The major factors causing the slowdown include:
        1. Sharply higher oil prices
        2. Pollution control and environmental regulation
    3. Influx of less experienced and skilled workers during the 1970s
  5. How is the Economic Pie Divided?
Human Capital accounts for 81% of total earnings. Rent, interest, and corporate profits account for the rest..

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This page was last modified Monday, April 8, 1997.