Chapter 19 and 20
Chapter 19 and 20 Econ 1101
U of M
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This 4 page Class Notes was uploaded by Emma Norden on Sunday December 13, 2015. The Class Notes belongs to Econ 1101 at University of Minnesota taught by Thomas Holmes in Fall 2015. Since its upload, it has received 35 views. For similar materials see Principles of Microeconomics in Economcs at University of Minnesota.
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Date Created: 12/13/15
Econ Week 14 Chapter 19: Earnings and Discrimination Compensating differential: difference in wages that arises to compensate for nonmonetary characteristics of different jobs -Ex. A worker gets paid more to do a dangerous, dirty job than someone else with similar education who has a less dangerous job Human capital: accumulation of investment in people such as education Wage difference between highly educated and uneducated workers can be considered compensating differential to make up for the cost of going to college -Firms are willing to pay more for educated workers because they are more productive -For workers, it is an incentive to go to college because they get paid more -Ability, effort, and chance all play important roles in the wages that workers earn An alternative View to Education: Signaling: a higher education seems to signal a higher ability to employers Two views, two very different outcomes: Human capital theory: education makes workers more productive -increasing education levels of all workers would raise productivity and thus wages Signaling view: education is correlated with natural ability -education does not increase productivity so raising educational levels will not raise wages The Superstar Phenomenon Why do superstars earn so much? Market must have 2 characteristics: 1. Every customer wants to enjoy the good supplied by the best producer 2. Good is produced with technology that makes it possible for best producer to supply everyone at low cost Ex. Everyone wants to see Leonardo DiCaprio so they will see his next movie; it is also easy to make millions of copies of his film so he can provide his service to everyone simultaneously Sometimes, for some workers, wages are set above the level that would bring labor supply and demand into equilibrium This is due to: Minimum wage laws: Minimum wages raises wages that low skilled workers would get in an unregulated market Labor unions: Worker association that bargains with employers over wages and work conditions -Unions can raise wages because they can withhold labor supplied to firm by calling a strike Efficiency wages: Theory that says firms can benefit by paying higher wages because it will increase productivity -Result of above equilibrium wages is a surplus of labor or unemployment Discrimination: Offering different opportunities to similar individuals based on race, ethnicity, sex, age or other personal characteristics Table shows discrimination between whites and blacks and male and female -Does not prove discrimination, other variables such as human capital (education), and job characteristics play a role -Discrimination most likely plays a role in wage differences, but it’s unclear how much It’s possible that differences in human capital reflect a kind of discrimination themselves (Page 403) Business owners who care about profit have an advantage over firms who also discriminate Ex. If everyone wants brunette workers, then blonde workers will get a lower wage. Firm can hire blonde workers and save money. More and more firms hire blondes which eventually causes brunette firms to go out of business due to higher costs; wage differential disappears Firms are usually more interested in profit than discrimination Other factors like customer preferences (Ex. Customers prefer to be served by brunette waiters and are willing to pay more) and government mandating discriminatory practices can maintain wage differentials (Page 406) Chapter 20: Income Inequality and Poverty Possible explanation for recent rise in inequality: -Increase in international trade with low-wage countries and changes in technology reduce demand for unskilled labor and raises demand for skilled labor, thus unskilled labor wages have fallen and skilled labor wages have risen Poverty rate: Common gauge of distribution of income -Family whose income falls below poverty line set by federal government Poverty is correlated with: 1. Race- blacks and Hispanics 3x likely to be in poverty 2. Age- children are more likely to be in poor families and elderly less likely to be poor 3. Family composition- Single female parented family 5x more likely to live in poverty than married couples Problems in Measuring Inequality: In-kind Transfers: Transfers to the poor given in form of goods or services rather than cash (Ex. Food stamps) -Not accounted for in income distribution measurements The Economic Life Cycle: Income tends to increase with age, then falls again when people retire -Decline in income when people retire does not necessarily mean standard of living falls because people save money for retirement Transitory vs. Permanent Income: -Income can vary under certain conditions, thus permanent income (average income) would be a better gauge than annual income for determining inequality Economic Mobility: Family income changes over time so temporary poverty is more common than permanent poverty -Having above average income often carries over from parent to child, but persistence is not consistent Ex. If a father earns 20% above his generation’s average income, his son will earn 8% above his generation’s income Everything mentioned above was positive; that is, it described world how it is The rest will address a normative question: What should the government do about economic inequality? Political Philosophy of Redistributing Income: Utilitarianism (John Stuart Mill): Political philosophy that says government should choose policies that maximize total utility of everyone in society Utility: Measure of happiness or satisfaction -Utilitarianism is based on diminishing marginal utility (I.e. extra dollar gives more utility to a poor person than rich person -Does not advocate for complete equalization of income because people respond to incentives (i.e. People with high incomes pay more taxes and low income earners receive help from government providing less incentive to work hard) -Balances gains from greater equality with losses from distorted incentives, thus government stops short of complete equality to maximize total utility (Page 421) Liberalism (John Rawls): Political philosophy that says government should choose policies that are fair, as evaluated by an impartial observer behind a “veil of ignorance” (not knowing economic situation) -Instead of maximizing everyone’s utility as a utilitarian would do, maximizes minimum utility or worst off person (Maximin criterion) -Complete equality still wouldn’t be the goal due to incentives but redistribution is greater than utilitarianism -Form of social insurance; helping poorest we insure ourselves against possibility that we will be poor (Page 423) Libertarianism (Robert Nozick): Government should punish crimes and enforce voluntary agreements but income shouldn’t be redistributed -Income shouldn’t be taken from and given to others -People can only receive as an exchange or as a gift from others -Government should ensure everyone has equal opportunity to achieve success thus, there is no reason to redistribute income (Page 423) Policies to Reduce Poverty: Minimum Wage -Critics: Labor quantity is reduced; workers who remain employed benefit from higher wage but those who might have been employed at lower wage are worse off Labor demand is more elastic in long run; firms can adjust employment and production -Advocators: Helps working poor -Demand for unskilled labor is relatively inelastic so unemployment would increase only slightly Welfare: -Government programs that supplement incomes of the poor Critics: incentive to become needy Negative Income Tax: Tax systems that collects revenue from high income households and gives subsidies to low income households -Only qualification needed to receive subsidy is low income In-Kind Transfers: Goods and services given to poor to help raise living standards (clothes, food stamps, etc.) -Advocates: Ensures that poor get what they need most -Advocates of cash payments: government doesn’t know what poor people need the most; best to allow people to decide what they need most Antipoverty programs and Work Incentives: Ex. If $20,000 is required to maintain reasonable standard of living and government guarantees everyone that income, making up difference if you earn less than that, there is an incentive to work less (Page 424-427) Trade-off between equality and efficiency. The more equal pie is divided, the smaller the pie becomes
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