Chapter 7 The Wage Structure What makes equality such a difficult business is that we only want it with our superiors. —Henry Becque

7.1 Perfect Competition: Homogenous Workers and Jobs Homogenous Workers and Jobs

7.2 The Wage Structure: Observed Differential Hourly Earnings By Occupational Group, 2006

7.2 The Wage Structure: Observed Differential Hourly Earnings By Industry Group, 2006

7.2 The Wage Structure: Observed Differential Private Manufacturing Worker’s Hourly Earnings By State, 2006

7.3 Wage Differentials: Heterogenous Jobs Compensating Differentials 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.

7.3 Wage Differentials: Heterogenous Jobs Compensating Differentials 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

7.3 Wage Differentials: Heterogenous Jobs Compensating Differentials 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.

7.3 Wage Differentials: Heterogenous Jobs Compensating Differentials Extent of control over the work place Jobs with less personal control over the workplace and less flexible work hours pay higher wages.

7.3 Wage Differentials: Heterogenous Jobs Differing Skill Requirements 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

7.3 Wage Differentials: Heterogenous Jobs Efficiency Wage Payments 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

7.3 Wage Differentials: Heterogenous Jobs Other Job or Employer Heterogeneities 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.

7.3 Wage Differentials: Heterogenous Jobs Other Job or Employer Heterogeneities 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.

7.4 Wage Differentials: Heterogenous Workers NonCompeting Groups 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.

7.4 Wage Differentials: Heterogenous Workers Differing Preferences 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.

7.4 Wage Differentials: Heterogenous Workers Differing Preferences 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.

7.4 Wage Differentials: Heterogenous Workers Differing Preferences 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

7.5 The Hedonic Theory of Wages Indifference Map

7.5 The Hedonic Theory of Wages Isoprofit Curve

7.5 The Hedonic Theory of Wages Matching

7.5 The Hedonic Theory of Wages Labor Market Implications 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.

7.5 The Hedonic Theory of Wages Labor Market Implications 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

7.6 Wage Differentials: Labor market Imperfections Wage Rate Distributions

7.6 Wage Differentials: Labor market Imperfections Lengthy Adjustment Period

7.6 Wage Differentials: Labor market Imperfections Immobilities 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

7.6 Wage Differentials: Labor market Imperfections Immobilities Sociological immobilties Race and gender discrimination will cause racial and gender wage differentials to exist.