Chapter 19. 11. Explain the determinants (Compensating Differentials and Ability, Efforts, and Chance) of Equilibrium wages

11. Explain the determinants (Compensating Differentials and Ability, Efforts, and Chance) of Equilibrium wages. Please, demonstrate your explanations with some of your examples.
1) Compensating differential
}a difference in wages that arises to offset the nonmonetary characteristics of different jobs.
}For example: Hardworking person should earn more than the person, who works less.

}What do you choose?
}1) to be ticket checked person in a Cinema Town with 10$ an hour
}2)to be houseman that cleans the room with 10$ an hour
}Or
}1)to be Security in the night club with 15$ an hour(nightshift)
}2)to be Seller in the mall from 9 a.m to 7 p.m with 15$ an hour

CHANCE
Income from existing wealth of a person, which can be used for certain purposes.
}For example: An owner of the land rents out the land and tenants pay their rent.
}If a person owns real estate, this property can also generate earning

Efforts
The person, who works harder and productively earns higher wages.
Sometimes hard work is rewarded directly in the form of a higher annual salary or a bonus.

Natural ability is important for workers in all occupations. Because of heredity and upbringing, people differ in their physical and mental attributes. Some people are strong, others weak. Some people are smart, others less so. Some people are outgoing, others awkward in social situations. These and many other personal characteristics determine how productive workers are and, therefore, play a role in determining the wages they earn.

12. Explain in detail what Human Capital and Signaling mean. Expand your answer by differentiating the relationship of these two to the productivity. As an example, you can explain the theory that education acts as a signaling device. How does this contrast to the theory of education as an investment in human capital?

human capital
In most developed countries relationship between the level of wages and education is highly interdependent.
Many young people and their parents spent a lot of money for their education in the hope that in the future all of the costs will be paid back.
for example, college graduates in the United States earn almost twice as much as those workers who ended their education with a high school diploma.
Signaling.
}Signaling it is opposite of human capital.
According to this alternative view, when people earn a college degree, for instance, they do not become more productive, but they do signal their high ability to prospective employers. Because it is easier for high-ability people to earn a college degree than it is for low-ability people, more high-ability people get college degrees. As a result, it is rational for firms to interpret a college degree as a signal of ability

13. Please, give your detailed explanation why a worker’s wage might be above the level that balances supply and demand. Minimum wage, Market power of labor unions and Efficiency wages.

One reason for above-equilibrium wages is minimum-wage laws. Most workers in the economy are not affected by these laws because their equilibrium wages are well above the legal minimum. But for some workers, especially the least skilled and experienced, minimum-wage laws raise wages above the level they would earn in an unregulated labor market.

A second reason that wages might rise above their equilibrium level is the market power of labor unions. A unionis a worker association that bargains with employers over wages and working conditions. Unions often raise wages above the level that would prevail without a union, perhaps because they can threaten to withhold labor from the firm by calling a strike. Studies suggest that union workers earn about 10 to 20 percent more than similar nonunion workers.

A third reason for above-equilibrium wages is suggested by the theory of efficiency wages. This theory holds that a firm can find it profitable to pay high wages because doing so increases the productivity of its workers. In particular, high wages may reduce worker turnover, increase worker effort, and raise the quality of workers who apply for jobs at the firm. If this theory is correct, then some firms may choose to pay their workers more than they would normally earn.

Above-equilibrium wages, whether caused by minimum-wage laws, unions, or efficiency wages, have similar effects on the labor market. In particular, pushing a wage above the equilibrium level raises the quantity of labor supplied and reduces the quantity of labor demanded. The result is a surplus of labor, or unemployment.

14. Explain the role Customers and Government play in perpetuating discrimination in Labor markets. Moreover, when and why sometimes Employers discriminate in the Labor market. Examples are a MUST.

Competitive markets contain a natural remedy for employer discrimination. The entry into the market of firms that care only about profit tends to eliminate discriminatory wage differentials.

These wage differentials persist in competitive markets only when customers are willing to pay to maintain the discriminatory practice or when the government mandates it.

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