Mankiw Principles of Economics (3rd ed)

IN THE NEWS

Men, Women, and Wages

and training. Why did this dramatic narrowing in relative wages happen?

The answer has less to do with politics or protests than with the realities of the labor market. Although basic skills are acquired in school, it is in the labor market where specialized skills are developed that bring higher wages. During the three decades following World War II women entered the labor market in record numbers. But many of the new entrants had been out of the labor force for considerable periods of time, raising their children. These women diluted the skill level of the rapidly expanding group of employed women. This was the main reason why the gender gap in pay did not narrow during the postwar years.

six are now in the labor force; in 1960, the proportion was only 19 percent.)

And the work experience gained by these younger women is likely to have an even greater impact on their future earnings because their work experience has been more correctly anticipated. Many investment choices affecting careers are made at younger ages: years of schooling, subjects in school, other professional training. In the past, women were much less likely than men to invest in lengthy training because they assumed they would not be working enough years to justify it.

In fact, the National Longitudinal Surveys found that even in the late 1960s less than 30 percent of young

women anticipated that they would be working at age thirty-five, yet when this group actually reached thirty-five, more than 70 percent of them were in the labor force. Their underestimation of future work activity surely influenced their early career preparations (or lack thereof). More recent survey data show a dramatic change in expectations. The vast majority of young women now report an intention to work at age thirty-five.

Those changing work expectations are reflected in rising female enrollments in higher education. In 1960, women received 35 percent of all bachelor’s degrees in the U.S.; by the 1980s, they received somewhat more than half of them. In 1968, women received 8 percent of the medical degrees, 3 percent of the MBAs, and 4 percent of the law degrees granted that year. In 1986, they received 31 percent of the medical degrees and MBAs and 39 percent of the law degrees. This recent trend in schooling is likely to reinforce the rise in work experience and contribute to continuing increases in the relative earnings of women workers. . . .

Despite the advances of the past decade, women still earn less than men. The hourly earnings of women were 74 percent of the earnings of men in 1992 when ages twenty-five to sixty-four are considered, up from 62 percent in 1979. At ages twenty-five to thirty-four, where women’s skills have increased the most, the ratio is 87 percent.

Economist Barbara Bergmann and others attribute the pay gap to “widespread, severe, ongoing discrimination by employers and fellow workers.” But discrimination cannot be directly measured. Instead, researchers estimate the extent to which differences in productivity appear to explain the gap and then attribute the rest to discrimination. Such a conclusion is premature, however, when productivity differences are not accurately measured, which is usually the case.

For example, data are seldom available on lifetime patterns of work experience, and even less material is available on factors bearing on work expectations and the intensity and nature of work investments. As these are still the key sources of skill differences between men

and women, there is considerable room for interpretation and disagreement.

When earnings comparisons are restricted to men and women more similar in their experience and life situations, the measured earnings differentials are typically quite small. For example, among people twenty-seven to thirty-three who have never had a child, the earnings of women in the National Longitudinal Survey of Youth are close to 98 percent of men’s. . . .

It is true that women and men still do not have the same earnings. But I believe that the differential is largely due to continuing gender differences in the priority placed on market work vs. family responsibilities. Until family roles are more equal, women are not likely to have the same pattern of market work and earnings as men. Technology has reduced the burden of housework, but child care remains a responsibility that is harder to shift to the market.

SOURCE: The Wall Street Journal, October 7, 1994, p. A10.

IN THE NEWS

The Recent Push for Comparable Worth

too long, working women have seething while politicians have resilent,” said Karen Nussbaum, of the AFL-CIO’s Working department. “Pay equity can

long-standing wrong.” . . .

Diana Furchtgott-Roth, a resident felthe American Enterprise Institute, there are plenty of reasons why men women earn different wages—senior- job risk, and market demand for cer- skills—that have nothing to do with

discrimination and would not be erased by “cockeyed” pay-equity laws. She said you compare men and women with same qualifications doing the same women earn 95 percent of men’s

.

“Comparable worth is certainly mak- a comeback,” Furchtgott-Roth said, I believe it’s because feminists who

supported Clinton through the Lewinsky are demanding a political payoff. I see any Republican support for proposals.”

: The Boston Globe, February 25, 1999, pp. A22.

Workers earn different wages for many reasons. To some extent, wage differentials compensate workers for job attributes. Other things equal, workers in hard, unpleasant jobs get paid more than workers in easy, pleasant jobs.

Workers with more human capital get paid more than workers with less human capital. The return to

accumulating human capital is high and has increased over the past decade.

Although years of education, experience, and job characteristics affect earnings as theory predicts, there is much variation in earnings that cannot be explained by things that economists can measure. The unexplained variation in earnings is

largely attributable to natural ability, effort, and chance.

Some economists have suggested that more educated workers earn higher wages not because education raises productivity but because workers with high natural ability use education as a way to signal their high ability to employers. If this signaling theory were correct, then increasing the educational attainment of all workers would not raise the overall level of wages.

Wages are sometimes pushed above the level that brings supply and demand into balance. Three reason for above-equilibrium wages are minimum-wage laws, unions, and efficiency wages.

Some differences in earnings are discrimination on the basis of

Measuring the amount of discrimination is difficult, however, because one must correct for differences in human capital and job characteristics.

Competitive markets tend to limit the impact of discrimination on wages. If the wages of a group of workers are lower than those of another group for reasons not related to marginal productivity, then nondiscriminatory firms will be more profitable than discriminatory firms. Profit-maximizing behavior, therefore, can act to reduce discriminatory wage differentials. Discrimination can persist in competitive markets if customers are willing to pay more to discriminatory firms or if the government passes laws requiring firms to discriminate.

1.Why do coal miners get paid

with similar amounts of education?

2.In what sense is education a type

3.How might education raise a raising the worker’s productivity?

4.What conditions lead to economic expect to see superstars in dentistry?

5.Give three reasons why a worker’s above the level that balances

in deciding whether a group lower wage because of

economic competition tend to discrimination on the basis of

how discrimination might persist in

.

1.College students sometimes work as summer interns for private firms or the government. Many of these positions pay little or nothing.

a.What is the opportunity cost of taking such a job?

b.Explain why students are willing to take these jobs.

c.If you were to compare the earnings later in life of workers who had worked as interns and those who

had taken summer jobs that paid more, what would you expect to find?

2.As explained in Chapter 6, a minimum-wage law distorts the market for low-wage labor. To reduce this distortion, some economists advocate a two-tiered minimum-wage system, with a regular minimum wage for adult workers and a lower, “sub-minimum” wage

for teenage workers. Give two reasons why a single minimum wage might distort the labor market for teenage workers more than it would the market for adult workers.

3.A basic finding of labor economics is that workers who have more experience in the labor force are paid more than workers who have less experience (holding constant the amount of formal education). Why might this be so? Some studies have also found that experience at the same job (called “job tenure”) has an extra positive influence on wages. Explain.

4.At some colleges and universities, economics professors receive higher salaries than professors in some other fields.

a.Why might this be true?

b.Some other colleges and universities have a policy of paying equal salaries to professors in all fields. At some of these schools, economics professors have lighter teaching loads than professors in some other fields. What role do the differences in teaching loads play?

5.Sara works for Steve, whom she hates because of his snobbish attitude. Yet when she looks for other jobs, the best she can do is find a job paying $10,000 less than her current salary. Should she take the job? Analyze Sara’s situation from an economic point of view.

6.Imagine that someone were to offer you a choice: You could spend four years studying at the world’s best university, but you would have to keep your attendance there a secret. Or you could be awarded an official degree from the world’s best university, but you couldn’t actually attend. Which choice do you think would enhance your future earnings more? What does your answer say about the debate over signaling versus human capital in the role of education?

7.When recording devices were first invented almost 100 years ago, musicians could suddenly supply their music to large audiences at low cost. How do you suppose this event affected the income of the best musicians? How do you suppose it affected the income of average musicians?

8.Alan runs an economic consulting firm. He hires primarily female economists because, he says, “they will work for less than comparable men because women

have fewer job options.” Is Alan’s behavior admirable or despicable? If more employers were like Alan, what would happen to the wage differential between men and women?

9.A case study in this chapter described how customer discrimination in sports seems to have an important effect on players’ earnings. Note that this is possible because sports fans know the players’ characteristics, including their race. Why is this knowledge important for the existence of discrimination? Give some specific examples of industries where customer discrimination is and is not likely to influence wages.

10.Suppose that all young women were channeled into careers as secretaries, nurses, and teachers; at the same time, young men were encouraged to consider these three careers and many others as well.

a.Draw a diagram showing the combined labor market for secretaries, nurses, and teachers. Draw a diagram showing the combined labor market for all other fields. In which market is the wage higher? Do men or women receive higher wages on average?

b.Now suppose that society changed and encouraged both young women and young men to consider a wide range of careers. Over time, what effect would this change have on the wages in the two markets you illustrated in part (a)? What effect would the change have on the average wages of men and women?

11.Economist June O’Neill argues that “until family roles are more equal, women are not likely to have the same pattern of market work and earnings as men.” What does she mean by the “pattern” of market work? How do these characteristics of jobs and careers affect earnings?

12.This chapter considers the economics of discrimination by employers, customers, and governments. Now consider discrimination by workers. Suppose that some brunette workers did not like working with blonde workers. Do you think this worker discrimination could explain lower wages for blonde workers? If such a wage differential existed, what would a profit-maximizing entrepreneur do? If there were many such entrepreneurs, what would happen over time?

I N C O M E I N E Q U A L I T Y

A N D P O V E R T Y

“The only difference between the rich and other people,” Mary Colum once said to Ernest Hemingway, “is that the rich have more money.” Maybe so. But this claim leaves many questions unanswered. The gap between rich and poor is a fascinating and important topic of study—for the comfortable rich, for the struggling poor, and for the aspiring and worried middle class.

From the previous two chapters you should have some understanding about why different people have different incomes. A person’s earnings depend on the supply and demand for that person’s labor, which in turn depend on natural ability, human capital, compensating differentials, discrimination, and so on. Because labor earnings make up about three-fourths of the total income in the U.S. economy, the factors that determine wages are also largely responsible for determining how the economy’s total income is distributed among the various members of society. In other words, they determine who is rich and who is poor.

IN THIS CHAPTER YOU WILL . . .

Examine the degr ee of economic inequality in our society

Consider some pr oblems that arise

when measuring economic inequality

See how political philosophers view the government’s r ole in

r edistributing income

Consider the various policies aimed at helping poor families escape pover ty

What problems arise in measuring the amount of inequality?

How often do people move among income classes?

These measurement questions are the natural starting point from which to discuss public policies aimed at changing the distribution of income.

U.S. INCOME INEQUALITY

There are various ways to describe the distribution of income in the economy. Table 20-1 presents a particularly simple way. It shows the percentage of families that fall into each of seven income categories. You can use this table to find where your family lies in the income distribution.

For examining differences in the income distribution over time or across countries, economists find it more useful to present the income data as in Table 20-2. To see how to interpret this table, consider the following thought experiment. Imagine that you lined up all the families in the economy according to their annual income. Then you divided the families into five equal groups: the bottom fifth, the second fifth, the middle fifth, the fourth fifth, and the top fifth. Next you computed the share of total income that each group of families received. In this way, you could produce the numbers in Table 20-2.

These numbers give us a way of gauging how the economy’s total income is distributed. If income were equally distributed across all families, each one-fifth of families would receive one-fifth (20 percent) of income. If all income were concentrated among just a few families, the top fifth would receive 100 percent, and the other fifths would receive 0 percent. The actual economy, of course, is between these two extremes. The table shows that in 1998 the bottom fifth of all families received 4.2 percent of all income, and the top fifth of all families received 47.3 percent of all income. In other words, even though the top and bottom fifths include the same number of families, the top fifth has about ten times as much income as the bottom fifth.

The last column in Table 20-2 shows the share of total income received by the very richest families. In 1998, the top 5 percent of families received 20.7 percent of total income. Thus, the total income of the richest 5 percent of families was greater than the total income of the poorest 40 percent.

Table 20-2 also shows the distribution of income in various years beginning in 1935. At first glance, the distribution of income appears to have been remarkably stable over time. Throughout the past several decades, the bottom fifth of families

Table 20-1

THE DISTRIBUTION OF INCOME IN

THE UNITED STATES: 1998