Chapter 7 The Wage Structure What makes equality such a difficult business is that we only want it...

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


Hourly Earnings By Industry Group, 2006


Private Manufacturing Worker’s Hourly Earnings By State, 2006

7.3 Wage Differentials: Heterogenous Jobs

Compensating Differentials Compensating wage differentials consist of ext

ra 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 Sources of compensating differentials Risk of job injury or death Riskier jobs pay higher wages Fringe benefits Jobs with greater fringe benefits pay lower wa

ges Job status Jobs with greater prestige pay lower wages


Compensating Differentials Job location Cities with greater amenities pay lower wages. Cities with greater cost of living pay higher no

minal wages. Job security Jobs with greater job security pay lower wages. Prospect of wage advancement Jobs with greater wage advancement have lo

wer starting wages.


Compensating DifferentialsExtent of control over the work placeJobs with less personal control over the

workplace and less flexible work hours pay higher wages.


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 re

verse wage differences caused by compensating differentials. Example: Nurses earn more than ditch diggers


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 hirin

g and training costs are high. Empirical evidence There is mixed empirical evidence


Other Job or Employer Heterogeneities Union status Union workers earn more than nonunion work

ers. Most of the differential is an economic rent to u

nion workers. Discrimination Discrimination against women and minorities e

xists in some markets and creates wage differentials.


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 productiv

e Training, better workers, greater capital Higher wages may be a compensating wage di

fferential.

7.4 Wage Differentials: Heterogenous Workers

NonCompeting Groups Individuals differ in the type, amount, and quali

ty of their human capital. The result is the labor force consists of nonco

mpeting 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.


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.


Differing PreferencesDifferences in tastes for nonwage aspect

s of jobsPeople have different preferences for job se

curity, location, and risk.These differences in preferences create wa

ge differentials

7.5 The Hedonic Theory of Wages

Indifference Map


Isoprofit Curve


Matching


Labor Market Implications Workers with fewer nonwage amenities will get higher

wages. Laws with minimum safety standards may reduce utilit

y of some workers. Risk loving workers would prefer higher wages to great

er safety. Part of the male-female wage differential may reflect di

fferences in preferences for nonwage amenities. Women may prefer shorter commuting distances and

safer jobs.


Labor Market ImplicationsWorkers with strong preferences for fring

e benefits will match up with firms that can provide fringe benefits at low cost.Cafeteria plans which allow workers to choo

se 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


Lengthy Adjustment Period


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 w

age differentials to exist across geographic areas. Institutional immobilties Restrictions on mobility imposed by the government or

unions can deter mobility. Occupational licensing, apprenticeships


ImmobilitiesSociological immobiltiesRace and gender discrimination will caus

e racial and gender wage differentials to exist.

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