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Wage Rate Differentials

Wage Rate Differentials. Competitive labour markets: Consider two markets with different wages

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Wage Rate Differentials

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  1. Wage Rate Differentials

  2. Competitive labour markets: • Consider two markets with different wages • If there is a free access to a market with higher wage, a worker will move there. It would increase the wages in the low-wage market (because of a reduction in labour supply), and decrease the wages in the high-wage market (because of an increase in labour supply). • Yet we know there is non-trivial occupation wage structure. • There must be something that prevents the worker’s move from one occupation to another

  3. Factors to explain wage differentials: • Adjustment lag • So there is a change in some exogenous variable • The change shifts a curve in a market and leads to a new equilibrium • If the workers do not move immediately, wage differential exists for a while • This wage differential is temporary/transitional

  4. Labour market barriers: • Restrictions on mobility • We usually think regulation/law • Licence requirement • National border • But other things may work, too • Poor information about labour markets • Discrimination • Pre-market discrimination • Market discrimination • Detecting discrimination • Does discrimination make sense? • Geography • Language • Closed shop union • Government regulation • Education/training/licencing

  5. Compensating wage differentials • Jobs that stink • Risk of injury/illness • Stress • Wrong time shifts • Lifting heavy things • Risk of unemployment • Unpleasant environment • These produce compensating wage differentials • Jobs that are great • Opposite to bad • Flexible hours • Employment security • Long vacations • Status • Fringe benefits • These produce equalizing differences • It’s all relative • Can change within general equilibrium

  6. Personal characteristics • Heterogeneous workers • Education • Talent/ability • Are they ever independent variables?

  7. Discrimination • Is male-female discrimination real? • Part-time employment • Education • Experience • If all one can account for is accounted for, the answer is not clear • Statistical discrimination • In competitive markets, discrimination by employers cannot persist • It can persist in non-competitive markets • Regulations to preserve discrimination • Discrimination due to prejudice by workers may persist in any markets • Anti-discriminatory policies are consequential

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