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R 434 PA T S I X THE ECONOMICS OF LABOR MARKETS largely attributable to natural ability, effort, and chance. N 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. N 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. N N Key Concepts compensating differential, p. 419 human capital, p. 419 union, p. 425 strike, p. 425 efficiency p. wages, 425 discrimination, p. 426 comparable worth, p. 432 Questions for Review 1. 2. 3. 4. 5. Why do coal miners get paid more than other workers with similar amounts of education? In what sense is education a type of capital? How might education raise a workers wage without raising the workers productivity? What conditions lead to economic superstars? Would you expect to see superstars in dentistry? In music? Explain. Give three reasons why a workers wage might be above the level that balances supply and demand. 7. 6. What difficulties arise in deciding whether a group of workers has a lower wage because of discrimination? Do the forces of economic competition tend to exacerbate or ameliorate discrimination on the basis of race? Give an example of how discrimination might persist in a competitive market. 8. Problems and Applications 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 CCebook eBook ... View Full Document

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