Question

Each of the following observations, ceteris paribus, implies something about a particular labor market. For each one, (1) identify the relevant labor market; (2) state whether you expect the wage rate in that market to be higher than otherwise, or lower than otherwise; and (3) identify which conceptual explanation for wage differences (among those discussed in the chapter) you are applying to reach your conclusion.a. Elevator repairers have a higher accident rate than most other jobs. b. People who work in New York City have to pay higher rent than other people. c. People like to work in New York City because there is a lot to do there. d. It takes rare diligence, motivation, and practice to become a concert pianist. e. Los Angeles has passed legislation requiring that fortune tellers become certified by the city. f. Office cleaning services don't like to risk hiring exconvicts, because employers believe they are more likely to steal equipment than other employees.

Short answer

a. Elevator repairers earn higher wages due to occupational hazards. b. Wages in NYC are higher due to increased living costs. c. Wages might be lower in NYC due to more people wanting to work there. d. Concert pianists earn higher wages due to the requirement of rare skills. e. Fortune tellers in L.A. earn higher wages due to legislative certification requirements. f. Ex-convicts might earn lower wages in cleaning services due to hiring discrimination.

Step-by-step solution

Observation a

1. Relevant labor market is Elevator repair. 2. A higher accident rate increases the occupational hazard, thus the wage rate should be higher to compensate for this. 3. This is related to compensating wage differentials.

Observation b

1. Relevant labor market is general labor market in New York City. 2. Higher living cost or rent necessitates higher wages, hence we expect the wage rate to be higher. 3. This also falls under compensating wage differentials.

Observation c

1. Relevant labor market is the general labor market in New York City. 2. If people find it attractive to work in NYC, the wage rate might be lower because of increased labor supply. 3. Here we are applying the principle of supply and demand.

Observation d

1. Relevant labor market is Concert Pianists. 2. If it requires rare diligence, motivation, and practice, suggests scarcity of such talent, hence we should expect their wage rate to be higher. 3. This falls under the principle of human capital investment.

Observation e

1. Relevant labor market is fortune tellers in Los Angeles. 2. Legislation requiring certification adds an additional barrier for entry, hence we should expect higher wages due to decreased supply. 3. This falls under the theory of labor markets and institutions such as legislative requirements.

Observation f

1. Relevant labor market is office cleaning services. 2. If hiring risks are perceived to be higher for ex-convicts, their wage rate might be lower due to this resulting discrimination. 3. This falls under the discrimination in labor markets.

Key concepts

Compensating Wage Differentials

Compensating wage differentials refer to the additional wages paid to workers to compensate for unpleasant, risky, or otherwise undesirable aspects of a job. This concept helps explain why some jobs pay more than others, beyond the basic supply and demand considerations.

For example, jobs with higher accident rates or more dangerous working conditions might offer higher wages to attract workers willing to take those risks. Elevator repairers, as noted in the textbook exercise, have a higher accident rate, which makes their work riskier compared to many other occupations. As a result, they are likely to earn higher wages than less risky jobs. This wage increase acts as an incentive for workers to accept the potential risks involved.

Similarly, jobs located in areas with a higher cost of living, such as New York City, often pay more to offset the expenses such as higher rents. These wage differentials are needed to ensure that the workforce is adequately compensated for the additional costs they incur by working in those regions.

Human Capital Investment

Human capital investment refers to the expenditures individuals undertake to improve their productive capabilities and skills. This usually involves education and specialized training that enhance a person's job performance and career potential.

In the labor market, individuals with higher skills and qualifications often command higher wages because their abilities are more rare and valuable. The exercise gives the example of concert pianists who require rare levels of diligence, motivation, and practice to master their art. This specialized training represents a significant investment in human capital by the pianist.

Employers recognize such skills as beneficial and are willing to offer higher wages to attract and retain such talented individuals. This is because the return on investment from employing highly skilled workers is often much greater.

Discrimination in Labor Markets

Discrimination in labor markets occurs when certain groups of people are treated differently based on characteristics such as race, gender, or past criminal convictions, rather than their experience or skills. This differentiation can lead to unequal wages for similar work or job opportunities.

The textbook case discussed the reluctance of office cleaning services to hire ex-convicts due to concerns about theft. This perceived risk can lead to discrimination, resulting in lower wages for ex-convicts compared to non-convicts with similar qualifications and skills.

Such discrimination can create inefficiencies and injustices within the labor market, as it overlooks the actual abilities and potential of the workers, focusing instead on their background.

Supply and Demand in Labor Markets

Supply and demand are fundamental concepts that determine the price and quantity of goods in a market, including labor markets. In the context of labor, the supply refers to the number of workers available, while demand is the need for workers by employers.

When there is high demand for labor but a limited supply of workers, wages tend to increase. Conversely, when there is an abundant supply of labor and low demand, wages can decrease.

In the exercise, the general labor market in New York City is highlighted. Due to the many attractions of living and working in NYC, there may be a large supply of workers willing to take jobs there. This increased labor supply can drive down wages, as more people are competing for the same positions. Understanding these dynamics helps explain variations in wage levels across different locations and industries.