Discrimination

Earnings and Discrimination

Earning Differences not due to Discrimination

• Compensating Differentials - a difference in wages to offset non-monetary differences in jobs. Examples:
• Construction workers and coal miners have a dangerous job.
• Workers that work night shifts generally earn more than people working day shifts.

• Human Capital - investments in people, mainly education and on-the-job training. It leads to

  higher

  ---

  marginal product of labor and

  increases

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  the demand for labor.
• Ability, Effort and Chance - This can apply to people with a particular skill set. Examples
• Athletes with higher natural abilities earn more (this is not compensating differential).
• Some athletes earn more because they work harder (effort).
• Chance plays a role in that an athlete could get injured and earn less because of that injury.
• Chance also plays a role if an athlete may have gotten drafted by a team that gelled together very well with their style of play, and that could increase their pay down the road.

• Signaling - education is often used as a signal to firms that the individual has a higher ability, even if the education doesn't make them better qualified for that specific job. This theory says that more people getting educated does not necessarily make them more productive so it would have

  no

  ---

  effect on demand for labor and wages (opposite of human capital).
• Superstar Phenomenon - this applies to certain people that are extremely talented and able to supply everyone in the market at a low cost. Example: a lot of movie companies want to make movies with Leonardo Dicaprio.
• Everyone wants to enjoy the product supplied by the best producer.
• The good has to be produced with a technology that allows the best producer to supply everyone in the market at a low cost.
• This is not possible with plumbers because the best plumber cannot supply everyone in the market with their service.

• Efficiency Wages - Above equilibrium wages paid by firms to increase workers' productivity. Above equilibrium wages can also be due to unions bargaining for higher wages and due to minimum wage laws.

Discrimination

• Discrimination - offering different opportunities to similar individuals who differ only by race, ethnic group, sex, age, or other personal characteristics. Examples:
• On average, African American men earn 21% less than white men. This can be traced to the quality of education (human capital) in certain neighborhoods.
• Women are more likely to take time off work after having a child compared to men. There's also compensating differentials, for example, women are less likely to be truck drivers which might pay a higher wage.
• Discrimination by Employers - this generally tends to disappear over time because the firms that don't discriminate will be able to hire certain workers at a lower cost and replace the companies that discriminate. Example: if a restaurant only hires blonde waiters, its supply of labor will shift left and this will cause the wage to rise. The supply of waiters at other restaurants will shift right and the wage rates at those restaurants will decrease.

• Discrimination by Customers and Government - this generally does not disappear over time. Example: if some customers prefer blonde waiters then the discrimination will not disappear.
• Some restaurants will have blonde waiters that will generally have higher prices and other restaurants may have more brunette waiters with lower prices.
• Similarly, if the government says brunette waiters can wash dishes, but can't be waiters, the discrimination would continue.

Example: Earnings and Discrimination