← Ec 10a: Principles of Economics

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

  1. How it worksHow does an unpleasant or dangerous job have to pay a compensating wage differential to attract workers away from safer alternatives?
  2. 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.
  3. Common mistakeWhy isn't every wage gap between two jobs automatically evidence of unfairness?
  4. 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.

Human Capital and the Education Wage Premium

  1. How it worksHow does education build human capital that raises a worker's marginal product, and with it, the wage a firm is willing to pay?
  2. Worked exampleFind the lifetime earnings gap implied by a 15000 dollar per year wage premium for a college graduate over a 40 year career.
  3. Common mistakeWhy doesn't the education wage premium mean every additional year of schooling raises earnings by the same amount?
Your turn1 of 2
Find the lifetime earnings gap implied by a 16964 dollar per year wage premium for a college graduate over a 40 year career.

Wage Differences from Ability, Effort, and Chance

  1. 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?
  2. Common mistakeWhy isn't the entire gap between any two workers' wages explained by their choices alone?
  3. 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

  1. How it worksHow do economists try to isolate discrimination by statistically controlling for education, experience, and job type before comparing wages?
  2. 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.
  3. 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

  1. 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?
  2. Common mistakeWhy doesn't competition automatically erase discrimination when it comes from customers' preferences rather than the employer's own?
  3. 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?