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

D
AYS OF
L
ABOR
U
NITS OF
O
UTPUT
0
0
1
7
2
13
3
19
4
25
5
28
6
29
Each unit of output sells for $10. Plot the firm’s demand
for labor. How many days of labor should the firm hire?
Show this point on your graph.
P r o b l e m s a n d A p p l i c a t i o n s

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4 1 6
PA R T S I X
T H E E C O N O M I C S O F L A B O R M A R K E T S
9. (This question is challenging.) In recent years some
policymakers have proposed requiring firms to give
workers certain fringe benefits. For example, in 1993
President Clinton proposed requiring firms to provide
health insurance to their workers. Let’s consider the
effects of such a policy on the labor market.
a.
Suppose that a law required firms to give each
worker $3 of fringe benefits for every hour that the
worker is employed by the firm. How does this law
affect the marginal profit that a firm earns from
each worker? How does the law affect the demand
curve for labor? Draw your answer on a graph with
the cash wage on the vertical axis.
b.
If there is no change in labor supply, how would
this law affect employment and wages?
c.
Why might the labor supply curve shift in response
to this law? Would this shift in labor supply raise or
lower the impact of the law on wages and
employment?
d.
As Chapter 6 discussed, the wages of some
workers, particularly the unskilled and
inexperienced, are kept above the equilibrium level
by minimum-wage laws. What effect would a
fringe-benefit mandate have for these workers?
10. (This question is challenging.) This chapter has assumed
that labor is supplied by individual workers acting
competitively. In some markets, however, the supply of
labor is determined by a union of workers.
a.
Explain why the situation faced by a labor union
may resemble the situation faced by a monopoly
firm.
b.
The goal of a monopoly firm is to maximize profits.
Is there an analogous goal for labor unions?
c.
Now extend the analogy between monopoly firms
and unions. How do you suppose that the wage set
by a union compares to the wage in a competitive
market? How do you suppose employment differs
in the two cases?
d.
What other goals might unions have that make
unions different from monopoly firms?

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I N T H I S C H A P T E R
Y O U W I L L . . .
C o n s i d e r w h y i t i s
d i f f i c u l t t o m e a s u r e
t h e i m p a c t o f
d i s c r i m i n a t i o n o n
w a g e s
S e e w h e n m a r k e t
f o r c e s c a n a n d
c a n n o t p r o v i d e a
n a t u r a l r e m e d y f o r
d i s c r i m i n a t i o n
C o n s i d e r t h e d e b a t e
o v e r c o m p a r a b l e
w o r t h a s a s y s t e m
f o r s e t t i n g w a g e s
E x a m i n e w h y i n
s o m e o c c u p a t i o n s a
f e w s u p e r s t a r s e a r n
t r e m e n d o u s
i n c o m e s
E x a m i n e h o w w a g e s
c o m p e n s a t e f o r
d i f f e r e n c e s i n j o b
c h a r a c t e r i s t i c s
L e a r n a n d c o m p a r e
t h e h u m a n - c a p i t a l
a n d s i g n a l i n g
t h e o r i e s o f
e d u c a t i o n
L e a r n w h y w a g e s
r i s e a b o v e t h e l e v e l
t h a t b a l a n c e s
s u p p l y a n d d e m a n d
In the United States today, the typical physician earns about $200,000 a year, the
typical police officer about $50,000, and the typical farmworker about $20,000.
These examples illustrate the large differences in earnings that are so common in
our economy. These differences explain why some people live in mansions, ride in
limousines, and vacation on the French Riviera, while other people live in small
apartments, ride the bus, and vacation in their own back yards.
Why do earnings vary so much from person to person? Chapter 18, which de-
veloped the basic neoclassical theory of the labor market, offers an answer to this
question. There we saw that wages are governed by labor supply and labor de-
mand. Labor demand, in turn, reflects the marginal productivity of labor. In equi-
librium, each worker is paid the value of his or her marginal contribution to the
economy’s production of goods and services.
E A R N I N G S A N D
D I S C R I M I N A T I O N
4 1 7

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4 1 8
PA R T S I X
T H E E C O N O M I C S O F L A B O R M A R K E T S
This theory of the labor market, though widely accepted by economists, is
only the beginning of the story. To understand the wide variation in earnings that
we observe, we must go beyond this general framework and examine more pre-
cisely what determines the supply and demand for different types of labor. That is
our goal in this chapter.
S O M E D E T E R M I N A N T S O F E Q U I L I B R I U M WA G E S
Workers differ from one another in many ways. Jobs also have differing character-
istics—both in terms of the wage they pay and in terms of their nonmonetary at-
tributes. In this section we consider how the characteristics of workers and jobs
affect labor supply, labor demand, and equilibrium wages.
C O M P E N S AT I N G D I F F E R E N T I A L S
When a worker is deciding whether to take a job, the wage is only one of many job
attributes that the worker takes into account. Some jobs are easy, fun, and safe; oth-
ers are hard, dull, and dangerous. The better the job as gauged by these nonmon-
etary characteristics, the more people there are who are willing to do the job at any
“On the one hand, I know I could make more money if I 
left public service for the private sector, but, on the other 
hand, I couldn’t chop off heads.”

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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 1 9
given wage. In other words, the supply of labor for easy, fun, and safe jobs is
greater than the supply of labor for hard, dull, and dangerous jobs. As a result,
“good” jobs will tend to have lower equilibrium wages than “bad” jobs.
For example, imagine you are looking for a summer job in the local beach
community. Two kinds of jobs are available. You can take a job as a beach-badge
checker, or you can take a job as a garbage collector. The beach-badge checkers
take leisurely strolls along the beach during the day and check to make sure the
tourists have bought the required beach permits. The garbage collectors wake up
before dawn to drive dirty, noisy trucks around town to pick up garbage. Which
job would you want? Most people would prefer the beach job if the wages were
the same. To induce people to become garbage collectors, the town has to offer
higher wages to garbage collectors than to beach-badge checkers.
Economists use the term