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To what extent can the “market” justify wage differences? An economics perspective. Jenny Säve-Söderbergh, The Swedish Institute for Social Research , Stockholm University, Sweden. Overview. Why is the labor market not an ordinary market for goods or services?

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to what extent can the market justify wage differences an economics perspective

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

Jenny Säve-Söderbergh,

The Swedish Institute for Social Research ,

Stockholm University,

Sweden

overview
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
the labor market a particular market
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
the classical labor market basic assumptions and results
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!
why does the wage change
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
alternative theories
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.
wage differences between different individuals
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
changes in the wage spread
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
wage differences between similar individuals
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
discrimination
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!
discussion and implications
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
discussion and implications1
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
discussion and implications2
Discussion and Implications
  • Conclusion: To evaluate wage discrimination compare:
  • individual characteristics,
  • job characteristics and
  • market conditions: supply, demand and institutions