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

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Wage Rate Differentials

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Wage rate differentials

Wage Rate Differentials


Wage rate differentials

  • 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


Wage rate differentials

  • 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


Wage rate differentials

  • 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


Wage rate differentials

  • 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


Wage rate differentials

  • Personal characteristics

    • Heterogeneous workers

      • Education

      • Talent/ability

        • Are they ever independent variables?


Wage rate differentials

  • 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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