Chapter 12 - Krugman_CH12_281 11:02 AM Page 281 > Factor...

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chapter 281 12 >> OES HIGHER EDUCATION PAY ? Y ES , IT does: in the modern economy, employers are willing to pay a premium for workers with more education. And the size of that premium has increased a lot over the last few decades. Back in 1973 workers with advanced degrees, such as law degrees or MBAs, earned only 76 percent more than those who had only graduated from high school. By 2003 the premium for an advanced degree had risen to 120 percent. Who decided that the wages of workers with advanced degrees would rise so much compared with those of high school grads? The answer, of course, is that nobody decided it. Wage rates are prices, the prices of different kinds of labor; and they are decided, like other prices, by supply and demand. Still, there is a difference between the wage rate of high school grads and the price of used text- books: the wage rate isn’t the price of a good, it’s the price of a factor of production . And although markets for factors of pro- duction are in many ways similar to those Factor Markets and the Distribution of Income THE VALUE OF A DEGREE Jon Feingersch/Corbis D What you will learn in this chapter: How factors of production— resources like land, labor, and both physical capital and human capital —are traded in factor markets, determining the factor distribution of income How the demand for factors leads to the marginal productivity theory of income distribution An understanding of the sources of wage disparities and the role of discrimination The way in which a worker’s decision about time allocation gives rise to labor supply Tod Bigelow/Aurora Photos for goods, there are also some important differences. In this chapter, we examine factor markets, the markets in which factors of production such as labor are traded. Factor markets, like markets for goods and services, play a crucial role in the economy: they allocate productive re- sources to producers and help ensure that those resources are used efficiently. This chapter begins by describing the major factors of production. Then we consid- er the demand for factors of production, which leads us to a crucial insight: the mar- ginal productivity theory of income distribution . We then consider some challenges to the marginal productivity theory. The final sec- tion of the chapter looks at the supply of the most important factor, labor. If you’ve ever had doubts about attending college, consider this: factory workers with only high school degrees will make much less than college grads. The present discounted value of the difference in lifetime earnings is as much as $300,000. Krugman_CH12_281 11/11/04 11:02 AM Page 281
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The Economy’s Factors of Production You may recall that we defined a factor of production in Chapter 2 in the context of the circular-flow model; it is any resource that is used by firms to produce goods and services, items that are consumed by households. Factors of production are bought and sold in factor markets, and the prices in factor markets are known as factor prices .
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