Micro Chapter 13
Earnings, Productivity, and the
Job Market
3 Learning Goals
1) Determine the reasons why earnings
differ between jobs
2) Analyze the practice of employment
3) Relate worker productivity to earnings
Why Do Earnings Differ?
Watch video: Monsters Inc-productivity
Who would you pay more?
Wages differ for two general
(1) Differences in workers
(2) Differences in jobs
(1) Differences in workers:
(a) Productivity
– If MP increases, then MRP increases so the
individual is more valuable to the firm
(b) Preferences
– Preferences can impact productivity
(c) Race and gender
– This is not necessarily discrimination
– This can also increase wages
– Examples: restaurant workers, interpreters,
labor-intensive jobs
Much of the earnings differential
can be explained with supply and
demand analysis
Watch content video: earnings differential
Watch video: 20/20 Myths- teachers are
(2) Differences in jobs:
(a) Compensating wage differentials
– How much more salary do you require for:
– A high risk job?
– A job in an undesirable location?
– Environmental factors?
(b) Labor immobility
You Think You’ve Got a Bad Job! A report on BBC World
discussed the problems of gatherers of wild honey in the
mangrove forests of Bangladesh. This is an extremely risky
job- not because of problems with the bees that produce the
honey- they’re pretty harmless. The problem is with the
tigers that live in the swamps and that like to eat the honey
(and also unfortunately the honey-gatherers whom they
confront). Indeed, in the past summer alone tigers ate two of
the roughly 400 honey-gatherers. Why would anyone take
this kind of risk, a 0.5 percent chance each year of being
killed on the job? The reason is that a honey gatherer can
earn in three months what an agricultural laborer earns in a
year. This 400 percent wage premium (a monthly wage four
times that in agriculture) is a sufficient compensating wage
differential to induce workers to face an annual risk of onthe-job death of 0.5 percent, far higher than the risk in any
occupation in the United States.
Q: Name at least two jobs that you think would require a
compensating wage differential. Why?
Watch video: Night at the Museumcompensating wage differential
Q13.1 An individual who possesses a
specialized skill that is difficult to execute will
necessarily receive wages considerably higher
than those who lack this skill.
2. receive a wage determined by the number of
other persons possessing this skill.
3. receive a high wage only when this skill is in
great demand relative to its supply.
4. receive a wage rate that is lower than similarly
productive individuals who lack this skill.
Q13.2 Low-skill workers earn a lower wage than more
experienced, higher skilled workers because the
low-skill workers lack the intelligence necessary to do
any other form of work.
low-skill workers were never given the opportunity to
invest in human capital.
supply of low-skill workers is large relative to the
demand for workers in this skill category.
low-skill worker is too lazy to search for other
employment opportunities.
The Economics of
Watch video: Stossel Micro Clip 11-wage
Michael Lewis’s book Moneyball (New York: Norton,
2003, p. 115) provides an excellent description of the
economic costs of discrimination (in the context of
choosing and recruiting young baseball players): “The
inability to envision a certain kind of person doing a
certain kind of thing because you’ve never seen
someone who looks like him do it before is not just a
vice. It’s a luxury. What begins as a failure of the
imagination ends as a market inefficiency: when you rule
out an entire class of people from doing a job simply by
their appearance, you are less likely to find the best
person for the job.” As with discrimination generally,
anyone who does not indulge in this sort of
discrimination and is willing to enlarge the set of choices
from which people can be recruited may reap
tremendous financial gains.
Q: Alan Greenspan, longtime head of the U.S. Federal
Reserve, ran a very profitable consulting company
before he took the Fed job. He hired only women
economists, who unfortunately are generally paid less
than men. His firm was very profitable. Why?
Watch video: Freakonomics-name
Read this section on your own and
understand the conclusions:
1) After adjusting for productivity-related
factors such as education and
experience, there is much less
discrimination than there appears to be
2) Usually, discrimination is costly and
market forces will put discriminating firms
at a disadvantage to compete
Watch video: Freakonomics- name does
not determine destiny
Link Between Productivity
and Earnings
How can you increase productivity?
(1) Increase nonhuman capital
(2) Improve people’s skills
(3) Advance technology
Q13.3 Wages in the United States are higher
than those in Mexico primarily because
1. output per worker is higher in Mexico than in the
United States.
2. output per worker is higher in the United States.
3. the human and physical capital of American
workers is lower than that of their Mexican
4. all of the above are correct.
Q13.4 The real wages of workers will tend to
be high when
output per worker is high.
capital is scarce.
industries are automating at a slow rate.
profits are low.
Q13.5 The linkage between high productivity
and high earnings is vitally important because
1. it provides individuals with a strong incentive to
develop skills and engage in activities that others
value highly.
2. high productivity (a large output per hour
worked) is the key to high living standards.
3. it brings the self interest of individuals into
harmony with economic progress.
4. All of the above are true.
Main points:
1) Higher output is the source of higher
2) Increasing productivity is therefore the
key ingredient to increasing earnings
2008 Median Earnings
(Inflation adjusted, for population over 25 years old)
Less than H.S.
H.S. Graduate (also GED)
Some College
(or Associate degree)
Bachelor Degree
Graduate or Professional Degree $62,179
Question Answers:
13.1 = 3
13.2 = 3
13.3 = 2
13.4 = 1
13.5 = 4

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