CHAPTER 3 LABOR FORCE PARTICIPATION

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C H A P T E R
8
Occupational Wage Differentials
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OVERVIEW OF CHAPTER

• The Pattern of Occupational Earnings
• Compensating Wage Differentials
• Occupational Licensing
• Occupational Attainment and Earnings of Men and
  Women

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OCCUPATIONAL DIFFERENTIALS

• Occupational differentials capture the influence
  of several of the principal determinants of
  earnings in the labor market (education,
  training, status, prestige, quality of working
  conditions)
• Theory of compensating wage differentials has two
  applications
• Governmental regulation of occupation safety and
  health conditions
• Factors that influence the mix of fringe benefits
  and wages in the compensation packages offered to
  workers by firms

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THE PATTERN OF OCCUPATIONAL EARNINGS

• Table 8.1 Median weekly earnings by gender in
  select occupations
• Key points
• Higher paid occupations generally are found in
  fields classified as professional or managerial
• Weekly earnings for women are generally less than
  those of men
• Due to occupational attainment.
• Even when in same occupations, women earn less.

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Median Weekly Earnings of Full-Time Wage and
Salary Workers in Selected Occupations by
Gender, 2001
Source Bureau of Labor Statistics, Employment
and Earnings (January 2002), Table 39.
Table 8.1
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THE PATTERN OF OCCUPATIONAL EARNINGS

• Adam Smith
• Market forces pecuniary aspects of occupations,
  including skills necessary
• Institutional forces govt policies that affect
  entrance of people into occupations
• Sociological forces tastes for certain
  occupations
• People choose occupations based on the whole
  package of attributes we consider all advantages
  and disadvantages.

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COMPENSATING WAGE DIFFERENTIALS

• Differences in pay represent compensating wage
  differentials in the sense that they equalize the
  net attractiveness of each occupation
• Job attributes
• Agreeableness
• Disagreeableness
• Figure 8.1 The compensating wage differential
  for a disagreeable occupation (psychic wage)

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The Compensating Wage Differential for a
Disagreeable Occupation
Figure 8.1
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COMPENSATING WAGE DIFFERENTIALS

• The smaller the probability of success, the
  higher must be the wage in the occupation for the
  expected value of the lifetime stream of income
  to equal that in an occupation in which success
  is assured
• Differences in tastes and abilities
• Figure 8.2 Heterogeneity of tastes and
  abilities and the size of compensating wage
  differentials
• The size of the compensating wage differential
  for a particular occupation depends on the
  strength of labor demand
• Economic rent payment above the factor inputs
  minimum asking price.

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Heterogeneity of Tastes and Abilities and the
Size of Compensating Wage Differentials
Figure 8.2
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COMPENSATING WAGE DIFFERENTIALS

• Unemployment and noncompeting groups
• John Stuart Mill criticized the theory of
  compensating differentials as not being
  consistent with observed reality
• Economy operates below full employment
• Monopolies
• Class system
• Difficult for unskilled workers to earn HK
• Prejudice
• Figure 8.3 The effect of unemployment and
  noncompeting groups on the size of compensating
  wage differentials

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The Effect of Unemployment and Noncompeting
Groups on the Size of Compensating Wage
Differentials
Figure 8.3
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THE HEDONIC THEORY YOU MAY SKIP THIS SECTION
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THE ECONOMICS OF EMPLOYEE BENEFITS

• There has been a large increase in fringe
  benefits
• Table 8.2 Benefits in employee compensation,
  2001
• 1/3 of benefits are govt mandated (SS UI)
• Large firms and union firms have greater benefits
  than small firms and non-union firms
• Pensions are deferred compensation.

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THE RELATIVE COST OF EMPLOYEE BENEFITS

• Figure 8.7 Wage/fringe isoprofit indifference
  curves
• Characteristics of isoprofits
• Those further to right represent higher costs,
  lower profits
• Negative slope tradeoff between wages and
  benefits
• Steepness reflects relative costs
• Referred to as an offer curve

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Wage/Fringe Isoprofit and Indifference Curves
Figure 8.7
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THE ECONOMICS OF EMPLOYEE BENEFITS

• The preferences of employees
• IC is convex to origin
• Cash can be spent on anything, but tax advantages
  to benefits
• Flatter IC prefers wages steeper IC prefers
  benefits

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The Equilibrium Combination of Wages and Benefits
Figure 8.8
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IMPLICATIONS

• In a competitive market, there is an inverse
  relationship between benefits and wages
• An equilibrium level of benefits will occur
  without govt intervention
• Family and Medical Leave Act of 1993
• Figure 8.9 The provision of maternity leave
  benefits

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The Provision of Maternity Leave Benefits
Figure 8.9
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OCCUPATIONAL LICENSING

• Govt policies may promote or restrict labor
  supply in certain occupations through licensing
• Who is licensed?
• Over 700 occupations are licensed
• Examples?
• Many licensing boards may have a conflict of
  interest because they regulate themselves.

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THE BENEFITS OF LICENSING

• Protect consumers
• Difficult for consumers to differentiate the
  quality of service and competency of
  practitioners
• Purchase could harm others
• Individuals systematically underestimate risk to
  themselves

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The Effect of Occupational Licensing on Wages
and Employment
Figure 8.10
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OCCUPATIONAL LICENSING AS A SOURCE OF MONOPOLY
RENTS

• Licensing my benefit the practitioners of the
  occupation more than the consumers
• Monopoly rent a wage that is artificially
  higher than the competitive level
• Raising minimum standards
• Raise standards of new entrants, but usually
  grandfather clause for current members

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OCCUPATIONAL LICENSING AS A SOURCE OF MONOPOLY
RENTS

• Restrictions on interstate mobility
• Many states only license in their state, no
  reciprocity
• Restrictions on training
• Limit number of new entrants through restrictions
  on training and education (AMA, ABA)

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OCCUPATIONAL ATTAINMENT AND EARNINGS OF MEN AND
WOMEN

• Women earn 76 of what men earn
• Gender differences in occupational attainment
• Majority of working women are in lower paying
  occupations
• Occupational segregation or concentration is
  pervasive
• Largest increase for women in professional,
  white-collar jobs little change in blue-collar
  jobs.

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Percentage of Female Workers in Traditionally
Male and Female Occupations in 1960, 1970, 1980,
1990, 2000, and 2001
Source Bureau of the Census, Census of the
Population (Washington, D.C GPO, 1960, 1970,
1980) and Bureau of Labor Statistics, Employment
and Earnings (January 2001), Table 39.
Table 8.3
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REASONS FOR OCCUPATIONAL SEGREGATION

• The discontinuous pattern of female participation
• Decreasing returns to human capital and value of
  OJT
• Firms want to increase return for specific OJT so
  they hire more men and this can create a vicious
  cycle
• Gender roles sociological forces have a strong
  influence
• Discrimination firms hiring patterns

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IN THE NEWS WHY MORE WOMEN MANAGERS AND
EXCUTIVES ARE PUTTING THEIR CAREERS ON HOLD
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POLICY APPLICATION 8-1 GOVERNMENT REGULATION OF
OCCUPATIONAL SAFETY AND HEALTH

• Competitive forces vs. govt intervention
• Increased injury rates in 1960s led to more govt
  regulation
• More concern over diseases

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THE OCCUPATIONAL SAFETY AND HEALTH ACT OF 1970

• Created OSHA under the Department of Labor
• Large focus today on ergonomics
• The case for and against government regulation
• Need to consider competitiveness and availability
  of information
• The size of compensating wage differentials
• Can workers actually measure risk?

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The Impact of Market Imperfections on the
Wage/Risk Equilibrium
Figure 8.11
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OSHA

• Issues in safety and health regulation
• The optimal level of regulation economists say
  measure costs and benefits
• The method of enforcement
• Many written standards, most inflexible
• Fines are minimal, compliance can be expensive

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EMPIRICAL EVIDENCE 8-1 COMPENSATION FOR
REPUTATION
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Compensating Wage Differentials andOccupational
and Employer Social Responsibility
SOURCE Adapted from Robert H. Frank, What Price
the Moral High Ground? Southern Economic Journal
63 (July 1996) 117, Figure 2.
Figure 8.12
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EMPIRICAL EVIDENCE 8-2 OCCUPATIONAL SEGREGATION
AND MALE/FEMALE EARNINGS DIFFERENTIALS
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The Relationship Between Occupational Earnings
and Percentage of Females
SOURCE Authors calculations based on results
found in Michael Baker and Nicole M. Fortin,
Gender Composition and Wages Why Is Canada
Different from the United States?, Mimeo,
University of Toronto (September 1998).
Figure 8.13
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