Why do similar jobs pay different wages?

Why do similar workers receive different salaries?

Average Annual Wages in Selected Occupations, 2007

DentistsLawyersPetroleum EngineersFinancial ManagersEconomistsComputer programmersRegistered NursesPolice OfficersElem. School Teachers Social workersBarbers, hairdressersConstruction workersCashiersFast Food Cooks

$147,000118,000114,000106,00086,700 72,00062,48050,67050,000 47,00026,00033,80018,40017,000

Source: Bureau of Labor Statistics, 2007

Occupation Annual Average Wages

Highest Paid CEOs, 2005

Name Company

Total Pay (millions)

Richard Fairbank Capital One Financial $249.4

Terry Semel Yahoo 230.6

Henry Silverman Cendant 140.0

Bruce Karatz KB Home 135.5

Richard Fuld, Jr. Lehman Brothers 122.7

Ray Irani Occidental Petroleum 80.7

Lawrence Ellison Oracle 75.3

John Thompson Symantec 71.8

Edwin Crawford Caremark Rx 69.7

Angelo Mozilo Countrywide Financial 69.0

Hourly Earnings By Occupation, 2006

Occupational Group Hourly Wage

Management, Business, And Financial $29.09

Installation, Maintenance, And Repair 18.68

Sales Workers 17.12

Office and Administrative Support 14.83

Service Workers 11.84

Farming, Fishing, And Forestry 9.85

• Human Capital: Skills, education, experienceProduced by:• 1) Families (investments of time, money, resources) • 2) Education gained in schools (K – 12 and college)• 3) Skills acquired while working, on-the-job training• Human capital theory:

– More schooling improves productivity– Lower quit and absentee rates– Less likely to abuse drugs and alcohol

• Differences in time preferences– presented-oriented people acquire less education

• not willing to sacrifice present consumption without a large increase in future income, discount future income

– future-oriented people acquire more education• willing to sacrifice present consumption for a small increase in

future income, value future income

Wage Differentials: Workers are different

• Non-competing skillsDoctors and computer programmers don’t compete in the same labor market

• Compensating wage differentials = extra pay that an employer must provide a worker for some undesirable job characteristic that does not exist in alternative employment

– Higher risk of injury or death– Lower job status/prestige– Job location

• in cities with lower amenities • In cities with greater cost of living• To attract workers with longer commute

– Less job security• Private sector vs government

– Prospect of wage advancement• Jobs with greater wage advancement have lower starting wages

– Flexible hours

Wage Differentials: Jobs are different

• Firm size– Large firms pay higher wages than small firms because

• More likely to be unionized• Workers more productive? better training, capital

• Higher wages to prevent turnover– Firms will pay above-market wages when hiring and training costs

are high.• Costly to monitor shirking

– Firms will pay above-market wages where it is costly to monitor employee performance or the employer’s cost of poor performance is high.

• Costly job search – Information is costly - time

• Geographic immobilties– Costs of moving deters migration to areas with higher wages

• Worker’s tastes for nonwage aspects of jobs– job security, location, commute, risk, co-workers– Women prefer shorter commute? May accept lower wages

Wage Differential: Other Explanations

Fringe Benefits as a Proportion of Compensation

70%

8%

7%

8%4% 3%

Wage andSalaries

Legally RequiredBenefits

Paid Leave

Insurance

Retirement

Supplemental Pay

Relative Growth of Fringe Benefits

0

5

10

15

20

25

30

Fringe Benefits as a Percent of Compensation

1929 1955 1965 1975 1986 1995 2000 2006

Physical appearance

• Hamermesh & Biddle (1994)– penalty & premium for appearance

• actually larger for men

– “plain” earn 5-10% less– “beautiful earn 5% premium

• Averett & Korenman (1996)– NLSY & impact of obesity– women have 15% penalty

• lower penalty for men• lower penalty for Black women vs. White women

Ratio of Female to Male Hourly Earnings

0%10%20%30%40%50%60%70%80%90%

1973 1978 1984 1989 1994 1999 2004

Fem

ale-

Mal

e E

arni

ngs R

atio

Ratio

Wage gap decreased because

1. skills of women have risen

2. occupational distributions have shifted in favor of women

3. decline in unionism has decreased male wages relative to female wages

4. discrimination has declined

Ratio of African-American to White Weekly Earnings

0%

20%

40%

60%

80%

100%

1973 1978 1984 1989 1994 1999 2004

Bla

ck-W

hite

Ear

ning

s R

atio

Ratio

Occupational Distribution by Gender, 2006

0 20 40 60 80 100

Percent Female

Secretaries

Registered Nurses

Elementary School Teachers

Waiters and Waitressess

Laundry Workers

Physicians and Surgeons

Janitors and Cleaners

Dentists

Taxicab Drivers

Construction Managers

• Women are 47% of the employed labor force

Occupational Distribution by Race, 2006

0 5 10 15 20 25 30 35

Percent African-American

Nursing Aides and Orderlies

Taxicab Drivers

Janitors and Cleaners

Typists

Laundry and Dry Cleaners

Registered Nurses

Elementary School Teachers

Waiters and Waitresses

Physicians and Surgeons

Construction Managers

• African-Americans are 11% of employed labor force