To what extent can the “market” justify wage differences? An economics perspective

1. To what extent can the “market” justify wage differences? An economics perspective Jenny Säve-Söderbergh, The Swedish Institute for Social Research , Stockholm University, Sweden

2. Overview • Why is the labor market not an ordinary market for goods or services? • Classical labor market model & Alternative models • When do we get different wages for different individuals? • When do we get different wages for identical individuals? • Discussion

3. The Labor Market – A Particular Market • Labor is a factor of production – not a finished product • Heterogeneous product • Service flow and a fixed equipment • Cannot be sold in parts – more risky • Difficulties measuring the quality • Regulated market

4. The classical Labor Market – Basic Assumptions and results • Supply and demand → market wage • Important assumption: Cost = marg.prod labor • Perfect competition –No employer can affect the wages! Efficient! • Monopsony: Employers affect the wages! Inefficient!

5. Why does the wage change? • Excess demand: due to a technological shock → employers are willing to pay more for labor • Excess supply, due to increased access to for example education → employees are willing to work for less

6. Alternative Theories • Efficiency wages: in the employer’s interest to pay higher wages than the market wage Why? A gift, less shirking, better selection. • Search theory: There is match-specific productivity between employers and employees. The larger the more to share. Wage bargaining.

7. Wage differences between different individuals • What is productivity? Can it be valued: Yes by the market! Determined by • individual characteristics: Education, experience, social skills • Job characteristics: responsibility, congestion, dirtiness, • Gives rise to a wage spread • Individual charac. and institutions

8. Changes in the wage spread Among groups • Demand for one group ↑, f. ex. a technological change • Supply of one group ↑, f. ex. educational policy • Changes in institutions Within groups • Product market deregulation– less possibility to discriminate, or trade unionization

9. Wage differences between similar individuals • Wage discrimination: an individual, or a group, receives a lower wage or remuneration due to a characteristic not related to the productivity • Becker (1957) • Employer discrimination, employee discrimination and customer discrimination

10. Discrimination • Important: It is costly to discriminate!! • If enough non-discriminatory employers, the discriminating employers will be competed away! • Statistical Discrimination! No preference for discrimination only lack of information!

11. Discussion and Implications • Measuring discrimination – average differences often bad measure • Equal Pay Act regulates two wage differences: equal wage for equal work and equal pay for comparable work: the latter most difficult! • What is comparable? Different markets must have different wages

12. Discussion and Implications • Wage setting in the public sector – market power – allowed? • Let discriminatory employers be competed away! Requires good information and no involuntary unemployment. • Not competed away if customer discrimination! • Wage legislation may be inefficient

13. Discussion and Implications • Conclusion: To evaluate wage discrimination compare: • individual characteristics, • job characteristics and • market conditions: supply, demand and institutions