This theory of the labor market, though widely accepted by economists, is only the beginning of the story. To understand the wide variation in earnings that we observe, we must go beyond this general framework and examine more precisely what determines the supply and demand for different types of labor. That is our goal in this chapter. | 19 Earnings and Discrimination Earnings and Discrimination Differences in Earnings in the United States Today The typical physician earns about $200,000 a year. The typical police officer earns about $50,000 a year. The typical farm worker earns about $20,000 a year. Earnings and Discrimination What causes earnings to vary so much? Wages are governed by labor supply and labor demand. Labor demand reflects the marginal productivity of labor. In equilibrium, each worker is paid the value of his or her marginal contribution to the economy’s production of goods and services. SOME DETERMINANTS OF EQUILIBRIUM WAGES Compensating differentials Human capital Ability, effort, and chance Signaling The superstar phenomenon Compensating Differentials Compensating differential refers to a difference in wages that arises from nonmonetary characteristics of different jobs. Coal miners are paid more than others with similar levels of education. Night shift workers are paid more than day shift workers. | 19 Earnings and Discrimination Earnings and Discrimination Differences in Earnings in the United States Today The typical physician earns about $200,000 a year. The typical police officer earns about $50,000 a year. The typical farm worker earns about $20,000 a year. Earnings and Discrimination What causes earnings to vary so much? Wages are governed by labor supply and labor demand. Labor demand reflects the marginal productivity of labor. In equilibrium, each worker is paid the value of his or her marginal contribution to the economy’s production of goods and services. SOME DETERMINANTS OF EQUILIBRIUM WAGES Compensating differentials Human capital Ability, effort, and chance Signaling The superstar phenomenon Compensating Differentials Compensating differential refers to a difference in wages that arises from nonmonetary characteristics of different jobs. Coal miners are paid more than others with similar levels of education. Night shift workers are paid more than day shift workers. Professors are paid less than lawyers and doctors. Human Capital Human capital is the accumulation of investments in people, such as education and on-the-job training. The most important type of human capital is education. Human Capital Education represents an expenditure of resources at one point in time to raise productivity in the future. By the year 2000, a man with a college degree earned more than 89 percent more than without one. Women showed a 70 percent increase in earnings due to a college degree. Table 1 Average Annual Earnings by Educational Attainment Copyright©2004 South-Western Ability, Effort, and Chance Why has the gap in earnings between skilled and unskilled workers risen in recent years? International trade has altered the relative demand for skilled and unskilled labor. Changes in technology have altered the relative demand for skilled and unskilled labor. Ability, Effort, and Chance Natural ability is important for workers in all occupations. Many personal .
