next page chapter 8: the wage structure. jump to first page 1. perfect competition: homogenous...
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Chapter 8: The Wage Structure
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1. Perfect Competition: Homogenous Workers and Jobs
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Homogenous Workers and Jobs
• Assume that the wage of $10 in submarket a is higher than the wage in other submarkets.
• Assuming that jobs and workers are homogenous and
information and mobility is costless, workers will leave the other submarkets for higher paying submarket a.
• The equilibrium wage rate will decrease in submarket a and rise in the other submarkets until thewage rate is the same in all submarkets ($8).
Quantity of Labor Hours
Wage rateS0a
D0a
Q0
$10
S1a
Q1
$8
• This will decrease the labor supply in the other submarkets and increase the labor supply in submarket a (S0 to S1).
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2. The Wage Structure: Observed Differential
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Hourly Earnings By Occupational Group, 2003
Occupational Group Hourly Wage
Management, Business, And Financial
$26.24
Installation, Maintenance, And Repair 17.14
Sales Workers 15.89
Office and Administrative Support 13.73
Service Workers 10.96
Farming, Fishing, And Forestry 9.81
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Hourly Earnings By Industry Group, 2003
Industry Group Hourly Wage
Finance, Insurance, Real Estate, $20.99
Public Administration 20.22
Mining 19.81
Transportation, Warehousing, Information, and Utilities
19.27
Manufacturing 18.51
Construction 17.31
Services 16.53
Retail Trade 13.21
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Private Manufacturing Worker’s Hourly Earnings By State, 2003
State Hourly Wage
Connecticut $23.13
New Jersey 22.91
Massachusetts 21.44
New York 19.09
Pennsylvania 18.26
Ohio 18.12
Texas 17.53
Arkansas 14.77
Mississippi 13.80
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3. Wage Differentials: Heterogenous Jobs
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Compensating wage differentials consist of extra pay that an employer must provide a worker for some undesirable job characteristic that does not exist in alternative employment. The wage differential is caused by a
decreased labor supply for the job that has the undesirable job characteristic and an increased labor supply for the alternative employment.
Compensating Differentials
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Sources of compensating differentials Risk of job injury or death
Riskier jobs pay higher wages Fringe benefits
Jobs with greater fringe benefits pay lower wages
Job status Jobs with greater prestige pay lower
wages
Compensating Differentials
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Job location Cities with greater amenities pay
lower wages. Cities with greater cost of living pay
higher nominal wages. Job security
Jobs with greater job security pay lower wages.
Prospect of wage advancement Jobs with greater wage advancement
have lower starting wages.
Compensating Differentials
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Extent of control over the work place Jobs with less personal control over
the workplace and less flexible work hours pay higher wages.
Compensating Differentials
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Jobs that require more education and training will pay a higher wage rate than those that do not. The wage difference between skilled
and unskilled workers is called the skill differential.
Skill differentials can increase, decrease, or reverse wage differences caused by compensating differentials. Example: Nurses earn more than ditch
diggers
Differing Skill Requirements
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Shirking model Firms will pay above-market wages
where it is costly to monitor employee performance or the employer’s cost of poor performance is high.
Turnover model Firms will pay above-market wages
when hiring and training costs are high. Empirical evidence
There is mixed empirical evidence.
Efficiency Wage Payments
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Union status Union workers earn more than
nonunion workers. Most of the differential is an economic
rent to union workers. Discrimination
Discrimination against women and minorities exists in some markets and creates wage differentials.
Other Job or Employer Heterogeneities
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Firm size Large firms pay higher wages than
small firms. Large firms are more likely to be
unionized. Workers at large firms may be more
productive• Training, better workers, greater capital
Higher wages may be a compensating wage differential.
Other Job or Employer Heterogeneities
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4. Wage Differentials: Heterogenous Workers
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Individuals differ in the type, amount, and quality of their human capital. The result is the labor force consists of
noncompeting groups of workers that are not easily substitutable for each other.
In the short run, these differences in human capital generate wage differentials.
In the long run, the wage differentials cause individuals to move to higher paying jobs to some extent.
NonCompeting Groups
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Differences in time preferences Persons who are presented-oriented (i.e.,
have a high discount rate) are not willing to sacrifice present consumption without a large increase in future income.
Persons who are future-oriented (i.e., have a high discount rate) are willing to sacrifice present consumption for a small increase in future income.
Persons with lower discount rates acquire more human capital and thus create wage differentials.
Differing Preferences
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Differences in tastes for nonwage aspects of jobs People have different preferences for job
security, location, and risk. These differences in preferences create
wage differentials
Differing Prefences
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Married males earn 8 to 40% more than single males.
Possible explanations: Differing personal attributes.
Characteristics such as personality and reliability enhance the probability of being married and also increase one’s wage.
Greater incentive to acquire human capital. Need to help support a family
Married vs Single Males
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Lower cost to acquire human capital. Face a lower interest rate and wives can
help finance education. Mixed evidence
One study finds that marriage makes men more productive. The marriage premium grows with
years married. Other studies find that differing
personal attributes explain the wage differential.
Married vs Single Males
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Questions for Thought:1. Discuss: “Many of the lowest-paid people in the
society—for example, short-order cooks– also have relatively poor working conditions. Hence, the theory of compensating wage differentials is disproved.”
2. Explain why “pay comparability” legislation requiring that the public sector remunerate government employees at wages equal to private-sector counterparts might create excess supplies of labor in public-sector labor markets.
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5. The Hedonic Theory of Wages
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Indifference Map
• The “hedonic” indifference map is composed of a number of indifference curves.
Nonwage amenity (job safety)
Wage Rate
I1
I2
I3
• Each individual curve shows the various combinations of wage rates and a particular nonwage amenity (for example job safety) that yield a specific level of total utility.
• Each curve to the northeast reflects a higher level of total utility.
• A steep curve implies that the person is risk averse—it takes a large increase in the wage rate to compensate for a small reduction in job safety.
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Isoprofit Curve
Nonwage amenity (job safety)
Wage Rate
P
• The employer’s isoprofit curve shows the various combinations of wage rates and a particular nonwage amenity (for example job safety) that yield a given level of total profit.
• Competition among firms will result in only normal profits (zero economic profit) in the long run.
• Firms will have to make theirwage rate-job amenity decisions along a curve such as P.
• The isoprofit curve gets steeper with higher levels of job safety since it gets more and more expensive to increase job safety.
• Firms differ in their ability to increase job safety and thus
have different isoprofit curves.
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Matching• The slope of isoprofit curve PA is
less steep than curve PB,which implies the marginal cost of job safety is more expensive at firm B than at firm A.
• Workers maximize utility by being tangent to the highest possible isoprofit curve.
• The risk averse worker will workfor the firm able to raise safety at
low marginal cost. The worker will get wage WA and safety SA.
• Indifference curve IA is steeper than curve IB which implies that person A is more risk averse
than person B.
• The risk loving worker will workfor the firm able to raise safety at high marginal cost. The worker will get wage WB and safety SB.
A
SA
WA
IB
IA
PA
Nonwage amenity (job safety)
Wage Rate
PB
B
SB
WB
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Workers with fewer nonwage amenities will get higher wages.
Laws with minimum safety standards may reduce utility of some workers. Risk loving workers would prefer higher
wages to greater safety. Part of the male-female wage differential
may reflect differences in preferences for nonwage amenities. Women may prefer shorter commuting
distances and safer jobs.
Labor Market Implications
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Workers with strong preferences for fringe benefits will match up with firms that can provide fringe benefits at low cost. Cafeteria plans which allow workers to
choose from a variety of fringe benefits allow workers to get higher utility since they are not forced to accept a fixed bundle.
Labor Market Implications
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6. Wage Differentials: Labor Market Imperfections
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Wage Rate Distributions• If information and job search is
costly, then a single equilibrium wage for a specific occupation is not likely to occur.
• A range of possible wages will exist for an occupation.
• These wage differentials will not cause job switching since the expected marginal benefits of the higher wage are exceeded by the expected marginal cost of obtaining the information.
• In this example, 20 percent of workers will earn between $6.80 and $6.99 per hour. However, 5% of the workers will earn between $6.00 and $6.19, while another 5% will earn between $7.60 and $7.79.
5%
8%
12%
15%
20%
15%
12%
8%
5%
0%
5%
10%
15%
20%
25%
Wage Rate
6.0 6.2 6.4 6.6 6.8 7.0 7.2 7.4 7.6
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Lengthy Adjustment Period
• An increase in labor demand initially may cause a substantial wage increase to W0 in
occupations with lengthy training periods.
• For a time the wage rate may oscillate above and below the long-run equilibrium wage rate
We before equilibrium in the market is finally restored.
• But the supply response to higher wage may create surplus of labor to the occupation in the next period, driving the wage rate lower to W1.
• During the transition periods, wage differentials between this occupation and others paying We will be observed.
Units of Time
Wage Rate
W0
W1
W2
W3
WeWe
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Labor immobilities are impediments to the movement of labor and can cause wage differentials.
Geographic immobilties Costs to moving can deter migration and
thus permit wage differentials to exist across geographic areas.
Institutional immobilties Restrictions on mobility imposed by the
government or unions can deter mobility. Occupational licensing, apprenticeships
Immobilities
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Sociological immobilties Race and gender discrimination will cause
racial and gender wage differentials to exist.
Immobilities
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Questions for Thought:1. Suppose that (a) employees must pay higher
wages to attract workers from wider geographic areas and hence higher wages are associated with longer commuting distances (less of the amenity “closeness of job to home”) and (b) females have greater tastes for having jobs close to their homes than males. Use the hedonic wage model to show graphically why a male-female wage differential might emerge, independently of skill differences or gender discrimination.
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EndChapter 8