THE ECONOMICS OF LABOR MARKETS
largely attributable to natural ability, effort, and
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