Mankiw Principles of Microeconomics (4th ed)

IN THE NEWS

The Recent Push for

Comparable Worth

OVER THE PAST SEVERAL YEARS, THE IDEA OF

comparable worth—sometimes called pay equity—has made a comeback among some political leaders.

L a b o r a n d W o m e n P u s h f o r E q u a l P a y f o r E q u i v a l e n t W o r k

BY MARY LEONARD

WASHINGTON—Nobody says men and women shouldn’t get equal pay for doing the same job. But what’s brewing now is a big push nationally by the president, organized labor, and women’s rights groups to level the gender playing field on wages for different but equivalent work.

In a strategy session today, Senator Tom Harkin, an Iowa Democrat who has been the lonely champion for pay-equity legislation since 1996, will meet with John Podesta, the president’s chief of staff, and other officials on ways the White House can boost his bill this year. Yesterday, the AFL-CIO launched a nationwide campaign to pass comparable-worth bills in 24 states, including Massachusetts.

What’s going on here? Trying to determine comparable salaries for jobs traditionally held by men and women is an old idea, discredited by some economists as unwieldy, if not downright dumb. They wonder who can and will decide the economic value of a riveter versus a nurse, the comparable pay for a probation officer and a librarian, the equivalent pay for an auto mechanic and a secretary.

Many see pay equity, even if it is difficult to enforce, as the only remedy for wage discrimination, a problem that persists for women, even as they have earned advanced degrees, climbed the corporate ladder, and plopped their children in day care while pursuing full-time jobs in large numbers. . . .

“For too long, working women have been seething while politicians have remained silent,” said Karen Nussbaum, director of the AFL-CIO’s Working Women’s department. “Pay equity can right a long-standing wrong.” . . .

Diana Furchtgott-Roth, a resident fellow at the American Enterprise Institute, says there are plenty of reasons why men and women earn different wages—senior- ity, job risk, and market demand for certain skills—that have nothing to do with discrimination and would not be erased by “cockeyed” pay-equity laws. She said when you compare men and women with the same qualifications doing the same jobs, women earn 95 percent of men’s salaries.

“Comparable worth is certainly making a comeback,” Furchtgott-Roth said, “and I believe it’s because feminists who supported Clinton through the Lewinsky mess are demanding a political payoff. I don’t see any Republican support for these proposals.”

SOURCE: The Boston Globe, February 25, 1999, pp. A1, 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 attributable to discrimination on the basis of race, sex, or other factors.

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 more than other workers with similar amounts of education?

2.In what sense is education a type of capital?

3.How might education raise a worker’s wage without raising the worker’s productivity?

4.What conditions lead to economic superstars? Would you expect to see superstars in dentistry? In music? Explain.

5.Give three reasons why a worker’s wage might be above the level that balances supply and demand.

6.What difficulties arise in deciding whether a group of workers has a lower wage because of discrimination?

7.Do the forces of economic competition tend to exacerbate or ameliorate discrimination on the basis of race?

8.Give an example of how discrimination might persist in a competitive market.

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?

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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.

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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

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Table 20-2

INCOME INEQUALITY IN THE

UNITED STATES. This table shows the percent of total beforetax income received by families in each fifth of the income distribution and by those families in the top 5 percent.