Lecture Notes: Why Do People Get Paid Different Amounts?

Key Concepts

• Marginal Revenue Product of Labor

  • Wages are set by the marginal revenue product of labor.
  • Workers who produce more value are paid more.
  • Rare skills that are highly valued result in higher wages.

• Market Value and Supply

  • Professional sports players are paid more due to high marginal value and low supply.
  • Technological advances have increased the market reach for top professionals in various fields.

• Global Differences in Wages

  • Productivity and economic environment affect wages.
  • Example: Differences between cooks in developing countries and the U.S.
  • American cooks benefit from productivity in other sectors and better outside opportunities.

Factors Affecting Wages

• Human Capital

  • Skills, education, on-the-job training, and experience enhance productivity.
  • Higher productivity leads to higher wages.

• Compensating Wage Differentials

  • Jobs with higher risk or unpleasant conditions pay more to compensate workers.
  • Examples include hazardous jobs, garbage collectors vs. fast food cooks.

• Working Conditions

  • Higher salaries may offset poor working conditions or higher cost of living.

• Discrimination

  • This is a significant factor that will be discussed further in another session.

Important Considerations

• Role of Supply

  • Higher supply of workers in a field can suppress wages.
  • Example: More potential cooks in India reduce wages compared to the U.S.

• Economic Productivity

  • Wages are influenced by the overall productivity of the economy.
  • Sectors with higher productivity and lucrative outside opportunities can offer higher wages.