CHAPTER 19 EARNINGS AND DISCRIMINATION 423
CASE STUDY
HUMAN CAPITAL, NATURAL ABILITY, AND
COMPULSORY SCHOOL ATTENDANCE
Does attending school increase wages because it increases productivity, or does
it only appear to increase productivity because high-ability people are more
likely to stay in school? This question is important both for judging the various
theories of education and for evaluating alternative education policies.
If economists could conduct controlled experiments like laboratory scien-
tists, it would be easy to answer this question. We could choose some experi-
mental subjects from the school-age population and then randomly divide them
into various groups. For each group we could require a different amount of
school attendance. By comparing the difference in the educational attainment
and the difference in subsequent wages of the various groups, we could see
whether education does in fact increase productivity. Because the groups would
be chosen randomly, we could be sure that the difference in wages was not at-
tributable to a difference in natural ability.
Although conducting such an experiment might seem difficult, the laws of
the United States inadvertently provide a natural experiment that is quite simi-
lar. All students in the United States are required by law to attend school, but
the laws vary from state to state. Some states allow students to drop out at age
view, when people earn a college degree, for instance, they do not become more
productive, but they do signal their high ability to prospective employers. Because
it is easier for high-ability people to earn a college degree than it is for low-ability
people, more high-ability people get college degrees. As a result, it is rational for
firms to interpret a college degree as a signal of ability.
The signaling theory of education is similar to the signaling theory of adver-
tising discussed in Chapter 17. In the signaling theory of advertising, the adver-
tisement itself contains no real information, but the firm signals the quality of its
product to consumers by its willingness to spend money on advertising. In the
signaling theory of education, schooling has no real productivity benefit, but the
worker signals his innate productivity to employers by his willingness to spend
years at school. In both cases, an action is being taken not for its intrinsic benefit
but because the willingness to take that action conveys private information to
someone observing it.
Thus, we now have two views of education: the human-capital theory and the
signaling theory. Both views can explain why more educated workers tend to earn
more than less educated workers. According to the human-capital view, education
makes workers more productive; according to the signaling view, education is cor-
related with natural ability. But the two views have radically different predictions
for the effects of policies that aim to increase educational attainment. According to
the human-capital view, increasing educational levels for all workers would raise
all workers’ productivity and thereby their wages. According to the signaling
view, education does not enhance productivity, so raising all workers’ educational
levels would not affect wages.
Most likely, truth lies somewhere between these two extremes. The benefits to
education are probably a combination of the productivity-enhancing effects of hu-
man capital and the productivity-revealing effects of signaling. The open question
is the relative size of these two effects.
424 PART SIX THE ECONOMICSOF LABOR MARKETS
16, while others require attendance until age 17 or 18. Moreover, the laws have
changed over time. Between 1970 and 1980, for instance, Wyoming reduced the
school-attendance age from 17 to 16, while Washington raised it from 16 to 18.
This variation across states and over time provides data with which to study the
effects of compulsory school attendance.
Even within a state, school-attendance laws have different effects on differ-
ent people. Students start attending school at different ages, depending on the
month of the year in which they were born. Yet all students can drop out as
soon as they reach the minimum legal age; they are not required to finish out
the school year. As a result, those who start school at a relatively young age are
required to spend more time in school than those who start school at a relatively
old age. This variation across students within a state also provides a way to
study the effects of compulsory attendance.
In an article published in the November 1991 issue of the Quarterly Journal of
Economics, labor economists Joshua Angrist and Alan Krueger used this natural
experiment to study the relationship between schooling and wages. Because the
duration of each student’s compulsory schooling depends on his or her state of
residence and month of birth, and not on natural ability, it was possible to isolate
the productivity-enhancing effect of education from the ability-signaling effect.
According to Angrist and Krueger’s research, those students who were required
to finish more school did earn significantly higher subsequent wages than those
with lower requirements. This finding indicates that education does raise a
worker’s productivity, as the human-capital theory suggests.
Although establishing the benefits of compulsory schooling is useful, it does
not by itself tell us whether these laws are desirable. That policy judgment re-
quires a more complete analysis of the costs and benefits. At the very least, we
would need to compare the benefits of schooling to the opportunity cost—the
wages that the student could have earned by dropping out. In addition, requir-
ing a student to stay in school may have external effects on others in society. On
the one hand, compulsory school attendance may reduce crime rates, for young
dropouts are at high risk of engaging in criminal activity. On the other hand, stu-
dents who stay in school only because they are required to do so may interfere
with the learning of other students who are more committed to their educations.
THE SUPERSTAR PHENOMENON
Although most actors earn very little and often have to take jobs as waiters to
support themselves, actor Robin Williams earned $23 million in 1997. Similarly,
although most people who play football do it for free as a hobby, Brett Favre earned
$6.75 million as a pro quarterback. Robin Williams and Brett Favre are superstars in
their fields, and their great public appeal is reflected in astronomical incomes.
Why do Robin Williams and Brett Favre earn so much? It is not surprising that
there are differences in incomes within occupations. Good carpenters earn more
than mediocre carpenters, and good plumbers earn more than mediocre plumbers.
People vary in ability and effort, and these differences lead to differences in in-
come. Yet the best carpenters and plumbers do not earn the many millions that are
common among the best actors and athletes. What explains the difference?
To understand the tremendous incomes of Robin Williams and Brett Favre, we
must examine the special features of the markets in which they sell their services.
Superstars arise in markets that have two characteristics:
CHAPTER 19 EARNINGS AND DISCRIMINATION 425
◆ Every customer in the market wants to enjoy the good supplied by the best
producer.
◆ The good is produced with a technology that makes it possible for the best
producer to supply every customer at low cost.
If Robin Williams is the funniest actor around, then everyone will want to see his
next movie; seeing twice as many movies by an actor half as funny is not a good
substitute. Moreover, it is possible for everyone to enjoy the comedy of Robin
Williams. Because it is easy to make multiple copies of a film, Robin Williams can
provide his service to millions of people simultaneously. Similarly, because foot-
ball games are broadcast on television, millions of fans can enjoy the extraordinary
athletic skills of Brett Favre.
We can now see why there are no superstar carpenters and plumbers. Other
things equal, everyone prefers to employ the best carpenter, but a carpenter, unlike
a movie actor, can provide his services to only a limited number of customers. Al-
though the best carpenter will be able to command a somewhat higher wage than
the average carpenter, the average carpenter will still be able to earn a good living.
ABOVE-EQUILIBRIUM WAGES:
MINIMUM-WAGE LAWS, UNIONS, AND EFFICIENCY WAGES
Most analyses of wage differences among workers are based on the equilibrium
model of the labor market—that is, wages are assumed to adjust to balance labor
supply and labor demand. But this assumption does not always apply. For some
workers, wages are set above the level that brings supply and demand into equi-
librium. Let’s consider three reasons why this might be so.
One reason for above-equilibrium wages is minimum-wage laws, as we first
saw in Chapter 6. Most workers in the economy are not affected by these laws be-
cause their equilibrium wages are well above the legal minimum. But for some
workers, especially the least skilled and experienced, minimum-wage laws raise
wages above the level they would earn in an unregulated labor market.
A second reason that wages might rise above their equilibrium level is the
market power of labor unions. A union is a worker association that bargains with
employers over wages and working conditions. Unions often raise wages above
the level that would prevail without a union, perhaps because they can threaten to
withhold labor from the firm by calling a strike. Studies suggest that union work-
ers earn about 10 to 20 percent more than similar nonunion workers.
A third reason for above-equilibrium wages is suggested by the theory of effi-
ciency wages. This theory holds that a firm can find it profitable to pay high wages
because doing so increases the productivity of its workers. In particular, high
wages may reduce worker turnover, increase worker effort, and raise the quality
of workers who apply for jobs at the firm. If this theory is correct, then some firms
may choose to pay their workers more than they would normally earn.
Above-equilibrium wages, whether caused by minimum-wage laws, unions,
or efficiency wages, have similar effects on the labor market. In particular, pushing
a wage above the equilibrium level raises the quantity of labor supplied and re-
duces the quantity of labor demanded. The result is a surplus of labor, or unem-
ployment. The study of unemployment and the public policies aimed to deal with
it is usually considered a topic within macroeconomics, so it goes beyond the
scope of this chapter. But it would be a mistake to ignore these issues completely
union
a worker association that bargains
with employers over wages and
working conditions
strike
the organized withdrawal of labor
from a firm by a union
efficiency wages
above-equilibrium wages paid by
firms in order to increase worker
productivity
426 PART SIX THE ECONOMICSOF LABOR MARKETS
when analyzing earnings. Although most wage differences can be understood
while maintaining the assumption of equilibrium in the labor market, above-
equilibrium wages play a role in some cases.
QUICK QUIZ: Define compensating differential and give an example.
◆ Give two reasons why more educated workers earn more than less
educated workers.
THE ECONOMICSOF DISCRIMINATION
Another source of differences in wages is discrimination. Discrimination occurs
when the marketplace offers different opportunities to similar individuals who
differ only by race, ethnic group, sex, age, or other personal characteristics. Dis-
crimination reflects some people’s prejudice against certain groups in society. Al-
though discrimination is an emotionally charged topic that often generates heated
debate, economists try to study the topic objectively in order to separate myth
from reality.
MEASURING LABOR-MARKET DISCRIMINATION
How much does discrimination in labor markets affect the earnings of different
groups of workers? This question is important, but answering it is not easy.
It might seem natural to gauge the amount of discrimination in labor markets
by looking at the average wages of different groups. For instance, in recent years
the wage of the average black worker in the United States has been about 20 per-
cent less than the wage of the average white worker. The wage of the average fe-
male worker has been about 30 percent less than the wage of the average male
worker. These wage differentials are sometimes presented in political debate as ev-
idence that many employers discriminate against blacks and women.
Yet there is an obvious problem with this approach. Even in a labor market free
of discrimination, different people have different wages. People differ in the
amount of human capital they have and in the kinds of work they are able and will-
ing to do. The wage differences we observe in the economy are, to a large extent, at-
tributable to the determinants of equilibrium wages we discussed in the preceding
section. Simply observing differences in wages among broad groups—whites and
blacks, men and women—says little about the prevalence of discrimination.
Consider, for example, the role of human capital. About 80 percent of white
male workers have a high school diploma, and 25 percent have a college degree.
By contrast, only 67 percent of black male workers have a high school diploma,
and only 12 percent have a college degree. Thus, at least some of the difference be-
tween the wages of whites and the wages of blacks can be traced to differences in
educational attainment. Similarly, among white workers, 25 percent of men have a
college degree, whereas only 19 percent of women have a college degree, indicat-
ing that some of the difference between the wages of men and women is attribut-
able to educational attainment.
discrimination
the offering of different opportunities
to similar individuals who differ only
by race, ethnic group, sex, age, or
other personal characteristics
CHAPTER 19 EARNINGS AND DISCRIMINATION 427
In fact, human capital is probably even more important in explaining wage
differentials than the foregoing numbers suggest. For many years, public schools
in predominantly black areas have been of lower quality—as measured by expen-
diture, class size, and so on—than public schools in predominantly white areas.
Similarly, for many years, schools directed girls away from science and math
courses, even though these subjects may have had greater value in the market-
place than some of the alternatives. If we could measure the quality as well as the
quantity of education, the differences in human capital among these groups would
seem even larger.
Human capital acquired in the form of job experience can also help explain
wage differences. In particular, women tend to have less job experience on average
than men. One reason is that female labor-force participation has increased over the
past several decades. Because of this historic change, the average female worker to-
day is younger than the average male worker. In addition, women are more likely
to interrupt their careers to raise children. For both reasons, the experience of the
average female worker is less than the experience of the average male worker.
Yet another source of wage differences is compensating differentials. Some an-
alysts have suggested that women take more pleasant jobs on average than men
and that this fact explains some of the earnings differential between men and
women. For example, women are more likely to be secretaries, and men are more
likely to be truck drivers. The relative wages of secretaries and truck drivers de-
pend in part on the working conditions of each job. Because these nonmonetary as-
pects are hard to measure, it is difficult to gauge the practical importance of
compensating differentials in explaining the wage differences that we observe.
In the end, the study of wage differences among groups does not establish any
clear conclusion about the prevalence of discrimination in U.S. labor markets.
Most economists believe that some of the observed wage differentials are attribut-
able to discrimination, but there is no consensus about how much. The only con-
clusion about which economists are in consensus is a negative one: Because the
differences in average wages among groups in part reflect differences in human capital and
job characteristics, they do not by themselves say anything about how much discrimination
there is in the labor market.
Of course, differences in human capital among groups of workers may them-
selves reflect discrimination. The inferior schools historically available to black
students, for instance, may be traced to prejudice on the partof city councils and
school boards. But this kind of discrimination occurs long before the worker enters
the labor market. In this case, the disease is political, even if the symptom is
economic.
DISCRIMINATION BY EMPLOYERS
Let’s now turn from measurement to the economic forces that lie behind discrimi-
nation in labor markets. If one group in society receives a lower wage than another
group, even after controlling for human capital and job characteristics, who is to
blame for this differential?
The answer is not obvious. It might seem natural to blame employers for dis-
criminatory wage differences. After all, employers make the hiring decisions that de-
termine labor demand and wages. If some groups of workers earn lower wages than
they should, then it seems that employers are responsible. Yet many economists are
428 PART SIX THE ECONOMICSOF LABOR MARKETS
CASE STUDY
SEGREGATED STREETCARS AND
THE PROFIT MOTIVE
In the early twentieth century, streetcars in many southern cities were segre-
gated by race. White passengers sat in the front of the streetcars, and black pas-
sengers sat in the back. What do you suppose caused and maintained this
discriminatory practice? And how was this practice viewed by the firms that
ran the streetcars?
In a 1986 article in the Journal of Economic History, economic historian Jen-
nifer Roback looked at these questions. Roback found that the segregation of
races on streetcars was the result of laws that required such segregation. Before
these laws were passed, racial discrimination in seating was rare. It was far
more common to segregate smokers and nonsmokers.
Moreover, the firms that ran the streetcars often opposed the laws requiring
racial segregation. Providing separate seating for different races raised the
firms’ costs and reduced their profit. One railroad company manager com-
plained to the city council that, under the segregation laws, “the company has
to haul around a good deal of empty space.”
Here is how Roback describes the situation in one southern city:
The railroad company did not initiate the segregation policy and was not at
all eager to abide by it. State legislation, public agitation, and a threat to
arrest the president of the railroad were all required to induce them to
separate the races on their cars. . . . There is no indication that the
management was motivated by belief in civil rights or racial equality. The
evidence indicates their primary motives were economic; separation was
skeptical of this easy answer. They believe that competitive, market economies pro-
vide a natural antidote to employer discrimination. That antidote is called the profit
motive.
Imagine an economy in which workers are differentiated by their hair color.
Blondes and brunettes have the same skills, experience, and work ethic. Yet, be-
cause of discrimination, employers prefer not to hire workers with blonde hair.
Thus, the demand for blondes is lower than it otherwise would be. As a result,
blondes earn a lower wage than brunettes.
How long can this wage differential persist? In this economy, there is an easy
way for a firm to beat out its competitors: It can hire blonde workers. By hiring
blondes, a firm pays lower wages and thus has lower costs than firms that hire
brunettes. Over time, more and more “blonde” firms enter the market to take ad-
vantage of this cost advantage. The existing “brunette” firms have higher costs
and, therefore, begin to lose money when faced with the new competitors. These
losses induce the brunette firms to go out of business. Eventually, the entry of
blonde firms and the exit of brunette firms cause the demand for blonde workers
to rise and the demand for brunette workers to fall. This process continues until
the wage differential disappears.
Put simply, business owners who care only about making money are at an ad-
vantage when competing against those who also care about discriminating. As a
result, firms that do not discriminate tend to replace those that do. In this way,
competitive markets have a natural remedy for employer discrimination.
CHAPTER 19 EARNINGS AND DISCRIMINATION 429
costly. . . . Officials of the company may or may not have disliked blacks,
but they were not willing to forgo the profits necessary to indulge such
prejudice.
The story of southern streetcars illustrates a general lesson: Business owners are
usually more interested in making profit than in discriminating against a par-
ticular group. When firms engage in discriminatory practices, the ultimate
source of the discrimination often lies not with the firms themselves but else-
where. In this particular case, the streetcar companies segregated whites and
blacks because discriminatory laws, which the companies opposed, required
them to do so.
DISCRIMINATION BY CUSTOMERS AND GOVERNMENTS
Although the profit motive is a strong force acting to eliminate discriminatory
wage differentials, there are limits to its corrective abilities. Here we consider two
of the most important limits: customer preferences and government policies.
To see how customer preferences for discrimination can affect wages, consider
again our imaginary economy with blondes and brunettes. Suppose that restau-
rant owners discriminate against blondes when hiring waiters. As a result, blonde
waiters earn lower wages than brunette waiters. In this case, a restaurant could
open up with blonde waiters and charge lower prices. If customers only cared
about the quality and price of their meals, the discriminatory firms would be dri-
ven out of business, and the wage differential would disappear.
On the other hand, it is possible that customers prefer being served by brunette
waiters. If this preference for discrimination is strong, the entry of blonde restau-
rants need not succeed in eliminating the wage differential between brunettes and
blondes. That is, if customers have discriminatory preferences, a competitive mar-
ket is consistent with a discriminatory wage differential. An economy with such
discrimination would contain two types of restaurants. Blonde restaurants hire
blondes, have lower costs, and charge lower prices. Brunette restaurants hire
brunettes, have higher costs, and charge higher prices. Customers who did not care
about the hair color of their waiters would be attracted to the lower prices at the
blonde restaurants. Bigoted customers would go to the brunette restaurants. They
would pay for their discriminatory preference in the form of higher prices.
Another way for discrimination to persist in competitive markets is for the
government to mandate discriminatory practices. If, for instance, the government
passed a law stating that blondes could wash dishes in restaurants but could not
work as waiters, then a wage differential could persist in a competitive market.
The example of segregated streetcars in the foregoing case study is one example of
government-mandated discrimination. More recently, before South Africa aban-
doned its system of apartheid, blacks were prohibited from working in some jobs.
Discriminatory governments pass such laws to suppress the normal equalizing
force of free and competitive markets.
To sum up: Competitive markets contain a natural remedy for employer discrimina-
tion. The entry of firms that care only about profit tends to eliminate discriminatory wage
differentials. These wage differentials persist in competitive markets only when customers
are willing to pay to maintain the discriminatory practice or when the government man-
dates it.
430 PART SIX THE ECONOMICSOF LABOR MARKETS
CASE STUDY DISCRIMINATION IN SPORTS
As we have seen, measuring discrimination is often difficult. To determine
whether one group of workers is discriminated against, a researcher must cor-
rect for differences in the productivity between that group and other workers in
the economy. Yet, in most firms, it is difficult to measure a particular worker’s
contribution to the production of goods and services.
One type of firm in which such corrections are easier is the sports team. Pro-
fessional teams have many objective measures of productivity. In baseball, for
instance, we can measure a player’s batting average, the frequency of home
runs, the number of stolen bases, and so on.
Studies of sports teams suggest that racial discrimination is, in fact, common
and that much of the blame lies with customers. One study, published in the Jour-
nal of Labor Economics in 1988, examined the salaries of basketball players. It found
that black players earned 20 percent less than white players of comparable ability.
The study also found that attendance at basketball games was larger for teams
WHY DOES THE AVERAGE FEMALE WORKER
earn less than the average male
worker? In the following article, econo-
mist June O’Neill offers some answers
to this question.
The Shrinking Pay Gap
B
Y JUNE E
LLENOFF O’NEILL
“Fifty-nine cents,” the popular button
said, a symbol of the stubborn fact that
throughout the post–World War II period,
women’s wages hovered at around 60
percent of men’s, despite an increasing
proportion of women working outside
the home. This gender gap did not de-
cline through the 1960s and the 1970s
despite the rise of the feminist move-
ment, equal pay and employment legisla-
tion, and affirmative action.
But starting in the Reagan years, the
gender gap in wages began to decline
dramatically. By some measures the ratio
of women’s earnings to men’s rose to
nearly 80 percent; and even this number,
I believe, overstates the gender gap be-
tween men and women with similar skills
and training. Why did this dramatic nar-
rowing in relative wages happen?
The answer has less to do with poli-
tics 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 de-
veloped 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.
Today’s working women, particularly
those younger than forty, are much more
nearly equal to men in work experience
than were their mothers. Through delayed
marriage, low fertility, and an increasing
tendency for mothers of young children to
work, women have acquired many more
years of continuous work experience than
was true in the past. (Close to 60 percent
of married women with children under age
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 earn-
ings because their work experience has
been more correctly anticipated. Many in-
vestment choices affecting careers are
made at younger ages: years of school-
ing, 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
IN THE NEWS
Men, Women, and Wages
CHAPTER 19 EARNINGS AND DISCRIMINATION 431
with a greater proportion of white players. One interpretation of these facts is that
customer discrimination makes black players less profitable than white players
for team owners. In the presence of such customer discrimination, a discrimina-
tory wage gap can persist, even if team owners care only about profit.
A similar situation once existed for baseball players. A study using data
from the late 1960s showed that black players earned less than comparable
white players. Moreover, fewer fans attended games pitched by blacks than
games pitched by whites, even though black pitchers had better records than
white pitchers. Studies of more recent salaries in baseball, however, have found
no evidence of discriminatory wage differentials.
Another study, published in the Quarterly Journal ofEconomics in 1990, ex-
amined the market prices of old baseball cards. This study found similar evi-
dence of discrimination. The cards of black hitters sold for 10 percent less than
the cards of comparable white hitters. The cards of black pitchers sold for 13
percent less than the cards of comparable white pitchers. These results suggest
customer discrimination among baseball fans.
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 dra-
matic 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 re-
ceived 35 percent of all bachelor’s de-
grees in the U.S.; by the 1980s, they
received somewhat more than half of
them. In 1968, women received 8 per-
cent 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 de-
grees and MBAs and 39 percent of the
law degrees. This recent trend in school-
ing 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 “wide-
spread, severe, ongoing discrimination by
employers and fellow workers.” But dis-
crimination cannot be directly measured.
Instead, researchers estimate the extent
to which differences in productivity ap-
pear to explain the gap and then attribute
the rest to discrimination. Such a conclu-
sion is premature, however, when pro-
ductivity differences are not accurately
measured, which is usually the case.
For example, data are seldom avail-
able on lifetime patterns of work experi-
ence, and even less material is available
on factors bearing on work expectations
and the intensity and nature of work in-
vestments. 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 re-
stricted to men and women more similar
in their experience and life situations, the
measured earnings differentials are typi-
cally 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 Sur-
vey 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 con-
tinuing gender differences in the priority
placed on market work vs. family respon-
sibilities. 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.
S
OURCE: The Wall Street Journal, October 7, 1994,
p. A10.
432 PART SIX THE ECONOMICSOF LABOR MARKETS
THE DEBATE OVER COMPARABLE WORTH
Should engineers get paid more than librarians? This question is at the heart of the
debate over comparable worth, a doctrine whereby jobs deemed comparable should
be paid the same wage.
Advocates of comparable worth point out that traditionally male occupations
have higher wages than traditionally female occupations. They believe that these oc-
cupational differences are discriminatory against women. Even if women were paid
the same as men for the same type of work, the gender gap in wages would persist
until comparable occupations were paid similar wages. Comparable-worth advo-
cates want jobs rated according to a set of impartial criteria—education, experience,
responsibility, working conditions, and so on. Under this system, comparably rated
jobs would pay the same wage. A librarian with a master’s degree, ten years of ex-
perience, and a 40-hour workweek, for instance, would be paid the same as an engi-
neer with a master’s degree, ten years of experience, and a 40-hour workweek.
Most economists are critical of comparable-worth proposals. They argue that
a competitive market is the best mechanism for setting wages. It would be nearly
impossible, they claim, to measure all of the factors that are relevant for determin-
ing the right wage for any job. Moreover, the fact that traditionally female occupa-
tions pay less than traditionally male occupations is not by itself evidence of
discrimination. Women have in the past spent more time than men raising chil-
dren. Women are, therefore, more likely to choose occupations that offer flexible
hours and other working conditions compatible with child-rearing. To some ex-
tent, the gender gap in wages is a compensating differential.
Economists also point out that comparable-worth proposals would have an
important unintended side effect. Comparable-worth advocates want the wages in
traditionally female occupations to be raised by legal decree. Such a policy would
have many of the effects of a minimum wage, which we first discussed in Chapter
6. In particular, when the wage is forced to rise above the equilibrium level, the
quantity of labor supplied to these occupations would rise, and the quantity de-
manded would fall. The result would be higher unemployment in traditionally fe-
male occupations. In this way, a comparable-worth law could adversely affect
some members of groups that the policy is aimed at helping.
QUICK QUIZ: Why is it hard to establish whether a group of workers is
being discriminated against? ◆ Explain how profit-maximizing firms tend to
eliminate discriminatory wage differentials. ◆ How might a discriminatory
wage differential persist?
CONCLUSION
In competitive markets, workers earn a wage equal to the value of their marginal
contribution to the production of goods and services. There are, however, many
things that affect the value of the marginal product. Firms pay more for workers
who are more talented, more diligent, more experienced, and more educated be-
cause these workers are more productive. Firms pay less to those workers against
whom customers discriminate because these workers contribute less to revenue.
comparable worth
a doctrine according to which jobs
deemed comparable should be paid
the same wage
. combination of the productivity-enhancing effects of hu-
man capital and the productivity-revealing effects of signaling. The open question
is the relative size of. degree, ten years of ex-
perience, and a 40-hour workweek, for instance, would be paid the same as an engi-
neer with a master’s degree, ten years of experience,