Unit 19: Earnings and Discrimination
Why two workers doing similar-looking jobs can earn very different wages, and what the data can and can't tell you about how much of that gap is discrimination.
5 topics · 16 questions
Each topic is a path, not a menu: work down it in order and every question builds on the one above. Click any of them to watch the answer draw itself.
Compensating Differentials
- How it worksHow does an unpleasant or dangerous job have to pay a compensating wage differential to attract workers away from safer alternatives?
- Worked exampleFind the size of a compensating wage differential if a safe desk job pays 50000 dollars a year and an equally skilled but dangerous job pays 58000 dollars.
- Common mistakeWhy isn't every wage gap between two jobs automatically evidence of unfairness?
- Going furtherWhat happens to a job's compensating differential if new safety technology makes the work much less dangerous?
Your turn1 of 2
Find the size of a compensating wage differential if a safe desk job pays 55446 dollars a year and an equally skilled but dangerous job pays 63682 dollars.Wage Differences from Ability, Effort, and Chance
- How it worksHow do differences in innate ability, effort, and even luck layer on top of education and compensating differentials to spread out the wage distribution?
- Common mistakeWhy isn't the entire gap between any two workers' wages explained by their choices alone?
- Ties togetherHow do ability and chance combine with the human-capital story to shape the income-inequality data covered next?
Your turn1 of 2
Two workers with identical education earn different wages, 75446 dollars and 46490 dollars. If 8593 dollars of the gap is explained by a difference in years of relevant experience, how much of the gap remains unexplained, attributable to ability, effort, or chance?Measuring Labor Market Discrimination
- How it worksHow do economists try to isolate discrimination by statistically controlling for education, experience, and job type before comparing wages?
- Worked exampleWalk me through a study finding a 10 percent raw wage gap between two groups that shrinks to 3 percent after controlling for experience and industry.
- Common mistakeWhy doesn't an unexplained wage gap after controlling for other factors prove discrimination beyond any doubt?
Your turn1 of 2
A study finds a 13 percent raw wage gap between two groups that shrinks to 4 percent after controlling for experience and industry. How many percentage points of the original gap does this controlling explain away?Discrimination by Employers, Customers, and Competitive Markets
- How it worksHow does hiring only from a favored group raise a discriminating firm's costs when equally skilled workers from the other group are available cheaper?
- Common mistakeWhy doesn't competition automatically erase discrimination when it comes from customers' preferences rather than the employer's own?
- Going furtherWhat happens to the persistence of discrimination in an industry where customers themselves prefer to be served by one group over another?
Your turn1 of 2
Two equally productive workers each work 39 hours a week, but a discriminating employer pays one 35 dollars per hour and the other, from a disfavored group, only 21 dollars per hour despite identical productivity. What weekly cost advantage could a rival employer gain by hiring only from the underpaid group instead?