Chapter 23

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Chapter 23Earnings and Income Distribution
ECONOMICS EXPLORE APPLYby Ayers and Collinge
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Learning Objectives

1. Relate the importance of wages and salaries.
2. Analyze why higher wages can lead an individual
   to prefer either more or fewer work hours.
3. List and explain the many causes of earnings
   differentials.
4. Assess the extent and significance of poverty and
   earnings differentials.

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Learning Objectives

1. Discuss significant differences between the types
   of income wages, rent, interest, and profit.
2. Discuss the life cycle of earnings through the
   use of the age/earnings profile.

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23.1MEASURING INCOMES

• Wages are the incomes workers earn from their
  jobs.
• The size of their incomes depends on two
  variables.
• The quantity of labor they supply.
• The amount they are paid.
• The price of labor is the wage rate, the amount
  an individual is paid per hour.
• When the wage rate is multiplied by hours worked,
  the result is earnings.

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U.S. National Income
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23.2INDIVIDUAL LABOR SUPPLY

• The reservation wage is the wage below which
  individuals choose not to work at all (i.e., they
  reserve their labor).
• Unlike supply curves for other things, the
  individuals supply curve of labor services has a
  backward bending portion.
• The substitution effect, and the income effect
  explain the backward-bending portion of the
  individuals supply curve of labor services

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Labor Supply Curve
Labor Supply
Wage Rate
Reservation Wage
Quantity of Labor
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Income and Substitution Effects

• Substitution Effect As wages rise, individuals
  will seek to work more - substituting away from
  leisure - because the opportunity cost of leisure
  becomes higher as wage rates rise.
• Income Effect As wages rise, higher wages bring
  higher incomes, which lead workers to demand more
  of all normal goods. Leisure is a normal good
  and, in order to buy more leisure, workers pay
  the opportunity cost of giving up the income from
  some work hours.

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Income and Substitution Effects
Labor Supply
Wage Rate
Reservation Wage
Quantity of Labor
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Effect of a Decrease in Non-labor Income
Supply if less income from other sources
Initial Supply
Wage Rate
Quantity of Labor
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23.3SOURCES OF EARNINGS DIFFERENTIALS

• Different jobs have their own advantages and
  disadvantages.
• Safe jobs are more attractive than dangerous
  jobs.
• Higher pay in the latter jobs, can equalize their
  attractiveness relative to the former jobs.
• Such increases are in pay are termed compensating
  differences.

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Explaining Labor Differentials

• Occupational choice
• Compensating wage differentials
• Unions
• Human capital
• Discrimination
• Luck and other factors

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Labor Unions

• Workers join labor unions to improve their pay
  and work environments.
• The decline in overall union membership mask the
  overall concentration of union membership in
  several key industries.
• Global competition is probably the most important
  factor behind the low percentage of union workers
  in the economy.

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Labor Unions

• Once a union is certified, a union engages in
  collective bargaining.
• These negotiations with employers are aimed at
  improving working conditions, pay, and benefits.
• Union bargaining power refers to the ability of a
  union to win an agreement with greater wages and
  benefits for its members.
• The primary weapon providing bargaining power to
  unions is the strike, or work stoppage.

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Labor Unions
PERCENTAGE OF WORKERS BELONGING TO A UNION BY
MAJOR INDUSTRY INDUSTRY
PERCENT Private
wage and salary workers 9.0 Agriculture
1.6 Mining 12.3 Construction
18.4 Manufacturing 14.6 Transportation
and public utilities 23.5 Wholesale and
retail trade 4.7 Finance, insurance, and real
estate 2.1 Services 5.9 Government
workers 37.5
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Labor Unions
PERCENTAGE OF WORKERS BELONGING TO A UNION BY
OCCUPATION OCCUPATION
PERCENT Managerial and professional
speciality 12.8 Technical, sales, and
administrative support 8.9 Service
occupations
13.3 Precision production, craft, and repair
21.3 Operators, fabricators, and laborers
19.9 Farming,
forestry, and fishing
4.6
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Labor Unions

• Another union weapon is the boycott, which is a
  campaign to persuade union members and the public
  to refrain from purchasing the output of a firm
  with which the union has a disagreement.
• Higher pay means fewer jobs offered by unionized
  employers.
• This increases the supply of labor to similar
  jobs at non-union employers, and drives down
  nonunion wages.

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Human Capital and Signaling

• Human capital is the knowledge, skills, and
  other productivity enhancing attributes
  embodied within individual workers.
• Building human capital involves out of pocket
  explicit cost, as well as opportunity cost of
  forgone earnings.
• The returns to the investment in a college
  diploma have increased over the past twenty
  years.

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Human Capital and Signaling

• The signaling hypothesis provides an alternative
  to the human capital explanation for greater
  earnings by college graduates.
• Signaling refers to the assumption that education
  provides information (signals) to employers about
  the attributes of job applicants.

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Discrimination and Earnings

• Discrimination occurs when a worker who is
  productive as other workers doing the same job is
  paid less because of race, gender, color,
  religion, or natural origin.
• Discrimination is illegal in the United States.
• Pre-market discrimination exist when a group
  experiences systematic discrimination prior to
  entering the labor market.
• When applicants are judged by the average
  characteristics of their racial or ethnic group,
  the have experienced statistical discrimination.

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23.4INCOME INEQUALITY

• Income inequality refers to differences in
  earnings.
• Low wages or lack of a job can create poverty.
• Poverty is associated with deprivation, which
  motivates government transfer programs to the
  poor.
• Transfer programs seek to preserve a minimum
  standard of living for the poor and are referred
  to as a safety net.
• Most households in poverty are very close to the
  government set safety net.

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Occupational Segregation

• Occupational segregation refers to the
  concentration of women workers in certain jobs
  (e.g., nursing and teaching). (Commonly cited as
  evidence that women are discriminated against in
  hiring)
• Womens earnings are also affected by
  discontinuous labor force participation, which
  occurs when a person leaves and later reenters
  the labor force.

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Occupational Segregation
MALE-DOMINATED OCCUPATIONS (PERCENTAGE OF
WORKERS WHO ARE MALES) Automobile mechanics
98.8 Carpenters 98.3 Firefighters
97.0 Airplane pilots and navigators 96.3
Truck drivers 95.3 Surveyors 92.6
Engineers 90.1
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Occupational Segregation
FEMALE-DOMINATED OCCUPATIONS (PERCENTAGE OF
WORKERS WHO ARE FEMALES) Dental hygienists
98.5 Prekindergarten and kindergarten
teachers 98.4 Child care workers
97.5 Receptionists 96.7 Cleaners and
servants 94.8 Cleaners and servants
94.8 Secretaries 94.6 Bookkeepers and
accounting clerks 92.2
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Occupational Segregation
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23.5OTHER INCOMES

• Economic rent refers to earnings in excess of
  opportunity costs.
• The incredible earnings reaped by many
  celebrities and superstar athletes are an example
  of economic rent.
• When demand is high and supply is fixed the
  result is sky-high earnings.

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Economic Rent
Supply by Someone with Unique Talents
Dollars

Hourly Earnings


Economic Rent
Opportunity Cost
Demand
Quantity of Labor
Quantity Supplied
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Interest Keeping Wealth Productive

• Interest is the price paid for the use of money.
• Interest is usually expressed in terms of a
  percentage, the interest rate.
• The payment of interest to lenders promotes
  savings, which is used to pay for investments in
  physical and human capital, that improve
  standards of living.

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Profit Motivating The Entrepreneur

• Profit motivates entrepreneurs, who perform the
  following functions.
• Combining resources
• Innovation
• Taking risks
• Entrepreneurs face the possibility losses as well
  as profits.

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23.6 EXPLORE APPLYThe Benefits of Schooling

• Balanced against the cost of schooling are the
  benefits.
• The tangible benefits of a College education are
  the increases in the ability to consume goods and
  services.
• A higher lifetime income.
• Greater job security.
• Relative safe, pleasant working environment that
  contributes to better health.

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Earnings and Education
Average yearly Earnings 80,000 60,000 40,000
20,000 0
Less than 9th grade
9th to 12th grade (no diploma)
High school graduate
Some college, no degree
Associate's degree
Master's degree
Professional degree
Doctorate degree
Bachelor's degree
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Three Age/Earnings Profiles
College graduate
Real Earnings
High school graduate
Dropouts
Age
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Earnings by Age Group
MEDIAN AGE GROUP
HOURLY EARNINGS
16 to 19 years 6.75 19 to 24 years 8.32 25
to 34 years 10.82 35 to 44 years 11.98 45 to
54 years 12.18 55 to 64 years 11.21 65 years
and over 8.37
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Terms Along the Way

• reservation wage
• substitution effect
• income effect
• compensating wage differentials
• collective bargaining

• signaling
• poverty line
• occupational segregation
• economic rent
• interest rate

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Test Yourself

• An individuals labor supply curve will start at
  the point called the
• backward-bending part.
• reservation wage.
• amount of non-labor income.
• income effect.

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Test Yourself

• 2. The job most likely to offer a significant
  compensating wage differential is
• baker.
• accountant.
• computer repair person.
• police officer.

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Test Yourself

• 3. Labor unions in the United States represent
  about __________ percent of workers.
• 44.
• 33.
• 22
• 11

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Test Yourself

• 4. A right to work law
• has no effect on union bargaining power.
• increases union bargaining power.
• decreases union bargaining power
• has unpredictable effects on union bargaining
  power.

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Test Yourself

• 5. From a signaling point of view, earning a
  college degree will
• have no effect on earnings.
• decrease earnings.
• increase earnings because college increases human
  capital.
• Increase earnings because a college degree is
  associated with personal characteristics
  employers value.

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Test Yourself

• 6. For blacks to have lower earnings than whites,
• employers must practice wage discrimination.
• statistical discrimination cannot be practiced by
  employers.
• pre-market discrimination could be the cause.
• blacks must be more productive than whites.

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The End! Next Chapter 24 Public Goods,
Information, and Regulation"