Wage DifferentialsWage Differentials

The Minimum WageThe Minimum Wage

• Federal government Federal government and states set a and states set a minimum wageminimum wage

• An effective An effective minimum wage minimum wage creates a wage floor creates a wage floor above the above the equilibrium wageequilibrium wage

The Minimum WageThe Minimum Wage

• If the minimum wage is below or equal If the minimum wage is below or equal to the equilibrium wage, it guarantees to the equilibrium wage, it guarantees workers a minimum income and does workers a minimum income and does not result in unemploymentnot result in unemployment

• But if it set above the equilibrium wage, But if it set above the equilibrium wage, unemployment could resultunemployment could result

Year Wage Year Wage 1939 30 cents 1976 $2.20 1945 40 cents 1977 $2.30 1950 75 cents 1978 $2.65 1956 $1.00 1979 $2.90 1965 $1.25 1980 $3.10 1967 $1.00 1981 $3.35 1968 $1.15 1990 $3.80 1969 $1.30 1991 $4.25 1970 $1.45 1996 $4.75 1971 $1.60 1997 $5.15 1974 $1.90 2007 $5.85 1975 $2.00 2008 $6.55

2009 $7.25

Wage DifferentialsWage Differentials

• Hourly wages and annual salaries differ Hourly wages and annual salaries differ greatly among occupationsgreatly among occupations

• Due to the effects of supply and Due to the effects of supply and demanddemand–Workers in industries with high labor Workers in industries with high labor

demand or low supply are likely to earn demand or low supply are likely to earn higher wages than workers in industries higher wages than workers in industries with low labor demand or high supplywith low labor demand or high supply

Wage DifferentialsWage Differentials• Also contributing: Also contributing: – human capital, compensation for undesirable human capital, compensation for undesirable

work, market imperfections and MRP differenceswork, market imperfections and MRP differences– Tied to communityTied to community– Union and government licensingUnion and government licensing– DiscriminationDiscrimination– DisabilityDisability

• But….models do not take into account But….models do not take into account salaries of workers paid by the year salaries of workers paid by the year regardless of daily output or commissions regardless of daily output or commissions and bonuses that are awardedand bonuses that are awarded

Marginal Revenue ProductivityMarginal Revenue Productivity• Strength of the labor demand differs among Strength of the labor demand differs among

occupations due to how much various occupations due to how much various occupational groups contribute to the occupational groups contribute to the revenue of their respective employersrevenue of their respective employers

• Revenue contribution depends on the Revenue contribution depends on the workers’ productivity and the strength of the workers’ productivity and the strength of the demand for the products that are helping to demand for the products that are helping to produceproduce

• Ex. Professional AthletesEx. Professional Athletes

Wage Differentials NotesWage Differentials Notes

The Minimum WageThe Minimum Wage

• Federal government Federal government and states set a and states set a minimum wageminimum wage

The Minimum WageThe Minimum Wage

• If the minimum wage is below or equal If the minimum wage is below or equal to the equilibrium wage, it guarantees to the equilibrium wage, it guarantees workers a minimum income and does workers a minimum income and does not result in unemploymentnot result in unemployment

• But if it set above the equilibrium wage, But if it set above the equilibrium wage, unemployment could resultunemployment could result

Year Wage Year Wage 1939 30 cents 1976 $2.20 1945 40 cents 1977 $2.30 1950 75 cents 1978 $2.65 1956 $1.00 1979 $2.90 1965 $1.25 1980 $3.10 1967 $1.00 1981 $3.35 1968 $1.15 1990 $3.80 1969 $1.30 1991 $4.25 1970 $1.45 1996 $4.75 1971 $1.60 1997 $5.15 1974 $1.90 2007 $5.85 1975 $2.00 2008 $6.55

2009 $7.25

Wage DifferentialsWage Differentials

• Hourly wages and annual salaries differ Hourly wages and annual salaries differ greatly among occupationsgreatly among occupations

• Due to the effects of supply and Due to the effects of supply and demanddemand

Wage DifferentialsWage Differentials• Also contributing: Also contributing:

• But….models do not take into account But….models do not take into account salaries of workers paid by the year salaries of workers paid by the year regardless of daily output or commissions regardless of daily output or commissions and bonuses that are awardedand bonuses that are awarded

Marginal Revenue ProductivityMarginal Revenue Productivity• Strength of the labor demand differs Strength of the labor demand differs

among occupations due to how much among occupations due to how much various occupational groups contribute to various occupational groups contribute to the revenue of their respective employersthe revenue of their respective employers

• Revenue contribution depends on the Revenue contribution depends on the workers’ productivity and the strength of workers’ productivity and the strength of the demand for the products that are the demand for the products that are helping to producehelping to produce