I n t h I s c h a p t e r y o u w I l L

Quarterly Journal of
Economics,
labor economists Joshua Angrist and Alan Krueger used this natural
experiment to study the relationship between schooling and wages. Because the
duration of each student’s compulsory schooling depends on his or her state of
residence and month of birth, and not on natural ability, it was possible to isolate
the productivity-enhancing effect of education from the ability-signaling effect.
According to Angrist and Krueger’s research, those students who were required
to finish more school did earn significantly higher subsequent wages than those
with lower requirements. This finding indicates that education does raise a
worker’s productivity, as the human-capital theory suggests.
Although establishing the benefits of compulsory schooling is useful, it does
not by itself tell us whether these laws are desirable. That policy judgment re-
quires a more complete analysis of the costs and benefits. At the very least, we
would need to compare the benefits of schooling to the opportunity cost—the
wages that the student could have earned by dropping out. In addition, requir-
ing a student to stay in school may have external effects on others in society. On
the one hand, compulsory school attendance may reduce crime rates, for young
dropouts are at high risk of engaging in criminal activity. On the other hand, stu-
dents who stay in school only because they are required to do so may interfere
with the learning of other students who are more committed to their educations.
T H E S U P E R S TA R P H E N O M E N O N
Although most actors earn very little and often have to take jobs as waiters to
support themselves, actor Robin Williams earned $23 million in 1997. Similarly,
although most people who play football do it for free as a hobby, Brett Favre earned
$6.75 million as a pro quarterback. Robin Williams and Brett Favre are superstars in
their fields, and their great public appeal is reflected in astronomical incomes.
Why do Robin Williams and Brett Favre earn so much? It is not surprising that
there are differences in incomes within occupations. Good carpenters earn more
than mediocre carpenters, and good plumbers earn more than mediocre plumbers.
People vary in ability and effort, and these differences lead to differences in in-
come. Yet the best carpenters and plumbers do not earn the many millions that are
common among the best actors and athletes. What explains the difference?
To understand the tremendous incomes of Robin Williams and Brett Favre, we
must examine the special features of the markets in which they sell their services.
Superstars arise in markets that have two characteristics:

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C H A P T E R 1 9
E A R N I N G S A N D D I S C R I M I N AT I O N
4 2 5
◆
Every customer in the market wants to enjoy the good supplied by the best
producer.
◆
The good is produced with a technology that makes it possible for the best
producer to supply every customer at low cost.
If Robin Williams is the funniest actor around, then everyone will want to see his
next movie; seeing twice as many movies by an actor half as funny is not a good
substitute. Moreover, it is 
possible
for everyone to enjoy the comedy of Robin
Williams. Because it is easy to make multiple copies of a film, Robin Williams can
provide his service to millions of people simultaneously. Similarly, because foot-
ball games are broadcast on television, millions of fans can enjoy the extraordinary
athletic skills of Brett Favre.
We can now see why there are no superstar carpenters and plumbers. Other
things equal, everyone prefers to employ the best carpenter, but a carpenter, unlike
a movie actor, can provide his services to only a limited number of customers. Al-
though the best carpenter will be able to command a somewhat higher wage than
the average carpenter, the average carpenter will still be able to earn a good living.
A B O V E - E Q U I L I B R I U M WA G E S :
M I N I M U M - WA G E L AW S , U N I O N S , A N D E F F I C I E N C Y WA G E S
Most analyses of wage differences among workers are based on the equilibrium
model of the labor market—that is, wages are assumed to adjust to balance labor
supply and labor demand. But this assumption does not always apply. For some
workers, wages are set above the level that brings supply and demand into equi-
librium. Let’s consider three reasons why this might be so.
One reason for above-equilibrium wages is minimum-wage laws, as we first
saw in Chapter 6. Most workers in the economy are not affected by these laws be-
cause 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
union
is 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 work-
ers earn about 10 to 20 percent more than similar nonunion workers.
A third reason for above-equilibrium wages is suggested by the theory of