Wages Structure

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The Wage Structure

M. Chaitanya


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1. Perfect Competition:Homogenous Workers

and Jobs


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Homogenous Workers andJobs

Assume that the wage of $10 insubmarket a is higher than thewage in other submarkets.

Assuming that jobs andworkers are homogenous andinformation and mobility iscostless, workers will leave the

other submarkets for higherpaying submarket a.

The equilibrium wage rate willdecrease in submarket a and risein the other submarkets until thewage rate is the same in allsubmarkets ($8).

Quantity of

Labor Hours

Wage rate S0a

D0a

Q0

$10

S1a

Q1

$8

This will decrease the laborsupply in the other submarketsand increase the labor supply insubmarket a (S0to S1).


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2. The Wage Structure:Observed Differential


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Hourly Earnings ByOccupational Group, 2003

Occupational Group Hourly Wage

Management, Business, And Financial $26.24

Installation, Maintenance, And Repair 17.14

Sales Workers 15.89

Office and Administrative Support 13.73

Service Workers 10.96

Farming, Fishing, And Forestry 9.81


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Hourly Earnings ByIndustry Group, 2003

Industry Group Hourly Wage

Finance, Insurance, Real Estate, $20.99

Public Administration 20.22

Mining 19.81

Transportation, Warehousing,

Information, and Utilities

19.27

Manufacturing 18.51

Construction 17.31

Services 16.53

Retail Trade 13.21


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Private Manufacturing WorkersHourly Earnings By State, 2003

State Hourly Wage

Connecticut $23.13

New Jersey 22.91

Massachusetts 21.44New York 19.09

Pennsylvania 18.26

Ohio 18.12

Texas 17.53

Arkansas 14.77

Mississippi 13.80



3. Wage Differentials:Heterogenous Jobs



Compensating wage differentialsconsist of extra pay that an employer

must provide a worker for some

undesirable job characteristic that does

not exist in alternative employment.

The wage differential is caused by a

decreased labor supply for the job that

has the undesirable job characteristicand an increased labor supply for the

alternative employment.

Compensating Differentials



Sources of compensating differentialsRisk of job injury or death

Riskier jobs pay higher wages

Fringe benefits Jobs with greater fringe benefits pay

lower wages

Job status

Jobs with greater prestige pay lowerwages




Job locationCities with greater amenities pay

lower wages.

Cities with greater cost of living pay

higher nominal wages. Job security

Jobs with greater job security pay

lower wages.

Prospect of wage advancement

Jobs with greater wage advancement

have lower startingwages.




Extent of control over the work place Jobs with less personal control over

the workplace and less flexible work

hours pay higher wages.




Jobs that require more education andtraining will pay a higher wage rate

than those that do not.

The wage difference between skilled

and unskilled workers is called theskill differential.

Skill differentials can increase,

decrease, or reverse wage differencescaused by compensating differentials.

Example: Nurses earn more than ditch

diggers

Differing Skill Requirements



Shirking modelFirms will pay above-market wages

where it is costly to monitor employee

performance or the employers cost of

poor performance is high.

Turnover model

Firms will pay above-market wages

when hiring and training costs are high. Empirical evidence

There is mixed empirical evidence.

Efficiency Wage Payments



Union statusUnion workers earn more than

nonunion workers.

Most of the differential is an economic

rent to union workers.

Discrimination

Discrimination against women and

minorities exists in some markets andcreates wage differentials.

Other Job or EmployerHeterogeneities



Firm sizeLarge firms pay higher wages than

small firms.

Large firms are more likely to be

unionized.

Workers at large firms may be more

productive

Training, better workers, greater capital

Higher wages may be a compensatingwage differential.

Other Job or EmployerHeterogeneities


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4. Wage Differentials:Heterogenous

Workers


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Individuals differ in the type, amount,and quality of their human capital.

The result is the labor force consists ofnoncompeting groupsof workers that

are not easily substitutable for eachother.

In the short run, these differences inhuman capital generate wagedifferentials.

In the long run, the wage differentialscause individuals to move to higherpaying jobs to some extent.

NonCompeting Groups


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Differences in time preferencesPersons who are presented-oriented (i.e.,

have a high discount rate) are not willing tosacrifice present consumption without a

large increase in future income.Persons who are future-oriented (i.e., have

a high discount rate) are willing to sacrificepresent consumption for a small increase infuture income.

Persons with lower discount rates acquiremore human capital and thus create wagedifferentials.

Differing Preferences


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Differences in tastes for nonwage aspectsof jobs

People have different preferences for job

security, location, and risk.

These differences in preferences create

wage differentials

Differing Prefences


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Married males earn 8 to 40% more thansingle males.

Possible explanations:

Differing personal attributes.

Characteristics such as personality and

reliability enhance the probability of

being married andalso increase ones

wage.

Greater incentive to acquire human

capital.

Need to help support a family

Married vs Single Males


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Lower cost to acquire human capital.Face a lower interest rate and wives can

help finance education.

Mixed evidence

One study finds that marriage makesmen more productive.

The marriage premium grows with

years married.

Other studies find that differing

personal attributes explain the wage

differential.

Married vs Single Males


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Questions for Thought:

1. Discuss: Many of the lowest-paid people in thesocietyfor example, short-order cooksalsohave relatively poor working conditions. Hence,the theory of compensating wage differentials isdisproved.

2. Explain why pay comparability legislationrequiring that the public sector remunerategovernment employees at wages equal to private-sector counterparts might create excess suppliesof labor in public-sector labor markets.


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5. The Hedonic Theoryof Wages


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Indifference Map

The hedonic indifference mapis composed of a number ofindifference curves.

Nonwage amenity (job safety)

Wage Rate

I1

I2I3

Each individual curve shows thevarious combinations of wagerates and a particular nonwageamenity (for example job safety)that yield a specific level of totalutility.

Each curve to the northeastreflects a higher level of totalutility.

A steep curve implies that theperson is risk averseit takes alarge increase in the wage rateto compensate for a smallreduction in job safety.


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Isoprofit Curve


Wage Rate

P

The employers isoprofit curve

shows the various combinationsof wage rates and a particularnonwage amenity (for examplejob safety) that yield a givenlevel of total profit.

Competition among firms willresult in only normal profits(zero economic profit) in thelong run.

Firms will have to make theirwage rate-job amenity decisionsalong a curve such as P.

The isoprofit curve gets steeperwith higher levels of job safety

since it gets more and moreexpensive to increase job safety.

Firms differ in their ability toincrease job safety and thus havedifferent isoprofit curves.


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Matching The slope of isoprofit curve PAis

less steep than curve PB,whichimplies the marginal cost of jobsafety is more expensive at firmB than at firm A.

Workers maximize utility bybeing tangent to the highestpossible isoprofit curve.

The risk averse worker will work

for the firm able to raise safety atlow marginal cost. The workerwill get wage WA and safety SA.

Indifference curve IA is steeperthan curve IB which implies that

person A is more risk averse thanperson B.

The risk loving worker will workfor the firm able to raise safetyat high marginal cost. The worker

will get wage WB and safety SB.

A

SA

WA

IB

IA

PA


Wage Rate

PB

B

SB

WB


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Workers with fewer nonwage amenitieswill get higher wages.

Laws with minimum safety standards mayreduce utility of some workers.

Risk loving workers would prefer higherwages to greater safety.

Part of the male-female wage differentialmay reflect differences in preferences for

nonwage amenities.Women may prefer shorter commuting

distances and safer jobs.

Labor Market Implications


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Workers with strong preferences for fringebenefits will match up with firms that can

provide fringe benefits at low cost.

Cafeteria plans which allow workers to

choose from a variety of fringe benefitsallow workers to get higher utility since

they are not forced to accept a fixed bundle.

Labor Market Implications


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6. Wage Differentials:Labor Market

Imperfections


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Wage Rate Distributions If information and job search is

costly, then a single equilibriumwage for a specific occupation isnot likely to occur.

A range of possible wages willexist for an occupation.

These wage differentials willnot cause job switching sincethe expected marginal benefitsof the higher wage are exceededby the expected marginal cost ofobtaining the information.

In this example, 20 percent of

workers will earn between $6.80and $6.99 per hour. However,5% of the workers will earnbetween $6.00 and $6.19, whileanother 5% will earn between$7.60 and $7.79.

5%

8%

12%

15%

20%

15%

12%

8%

5%

0%

5%

10%

15%

20%

25%

Wage Rate

6.0 6.2 6.4 6.6 6.8 7.0 7.2 7.4 7.6

L th Adj t t


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Lengthy AdjustmentPeriod

An increase in labor demand

initially may cause a substantialwage increase to W0 inoccupations with lengthytraining periods.

For a time the wage rate mayoscillate above and below thelong-run equilibrium wage rate

We before equilibrium in themarket is finally restored.

But the supply response tohigher wage may create surplusof labor to the occupation in thenext period, driving the wagerate lower to W1.

During the transition periods,wage differentials between thisoccupation and others paying Wewill be observed.

Units of Time

Wage Rate

W0

W1

W2

W3

WeWe


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Labor immobilities are impediments to themovement of labor and can cause wage

differentials.

Geographic immobilties

Costs to moving can deter migration and

thus permit wage differentials to exist

across geographic areas.

Institutional immobiltiesRestrictions on mobility imposed by the

government or unions can deter mobility.

Occupational licensing, apprenticeships

Immobilities


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Sociological immobiltiesRace and gender discrimination will cause

racial and gender wage differentials to

exist.

Immobilities


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Questions for Thought:

1. Suppose that (a) employees must pay higherwages to attract workers from wider geographicareas and hence higher wages are associatedwith longer commuting distances (less of theamenity closeness of job to home) and (b)

females have greater tastes for having jobs closeto their homes than males. Use the hedonic wagemodel to show graphically why a male-femalewage differential might emerge, independentlyof skill differences or gender discrimination.


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Wages Structure

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