5.5 Understanding Wage Disparities and Influences

Sep 25, 2024

Lecture Notes: Why Do People Get Paid Different Amounts?

Key Concepts

  • Wages and Marginal Revenue Product of Labor

    • Wages in a competitive labor market equal the marginal revenue product of labor.
    • Workers are paid based on the value of their output as judged by the market.

  • Factors Influencing Wages

    • Rare skills: Individuals with rare, highly valued skills (e.g., elite athletes, brilliant lawyers) earn more due to the high value of their output.
    • Marginal value: The additional value a worker brings can influence wage differences, even if the total value of different professions varies.

  • Profession Salary Differences

    • Pro athletes are paid more due to the high marginal value and global demand for their entertainment.
    • Nurses, while essential, have a lower marginal revenue product compared to star athletes.

  • Economic and Technological Influences

    • Technological advances have expanded the reach of top professionals, increasing their marginal revenue product.
    • Example: Global popularity of the NBA due to satellite TV and streaming.

  • Wage Disparities Across Countries

    • Productivity differences: Workers in developed countries often have higher productivity due to better tools and higher market value.
    • Larger supply of workers in certain sectors in developing countries, keeping wages low.

  • Human Capital and Productivity

    • Skills, education, and experience contribute to a person’s human capital, increasing productivity and potential wages.

  • Compensating Wage Differentials

    • Jobs with higher risk or unpleasant conditions often pay more to compensate for these factors.
    • Examples include hazardous chemical jobs, garbage collection, and war zone contracting.

  • Market and Work Conditions

    • Market demand, supply of labor, and work conditions influence wage levels.
    • Firms offer higher wages to attract workers in less desirable conditions or to compete with other sectors.

  • Discrimination

    • Mentioned as a topic for further discussion in another session.

Conclusion

  • Wages are influenced by a combination of individual skills, market demand, supply conditions, and work environment factors.
  • Understanding these factors can help explain why different jobs and workers receive varying levels of compensation.