Labour Economics assignment 1
zaleel503
Chapter10.pptxChapter Ten Wage Structures Across Markets
© 2012 McGraw-Hill Ryerson Ltd.
Prepared by Dr. Amy Peng
Ryerson University
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Learning Objectives
Discuss the large differences in wages paid to different workers depending on the kind of job they hold (industry and occupation) and where they work (region and size of the firm).
Explain the several factors that account for the wage differences across labour markets.
Discuss how the Roy model provides a more general approach to wage setting when different workers have different levels of skills and productive abilities.
Explain how interindustry wage differentials may be generated by “efficiency wages,” whereby firms pay higher wages because worker productivity depends on the wage rate.
Learn that the public sector is one particularly large industry (over one-fifth of employment in Canada) that pays higher wages and other forms of compensation than other industries.
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Wage Structure Determinants
Occupation
Industry
Region
Large vs. Small Firms
Men vs. Women
Race or Ethnicity
Immigrant Status
Union Status
Public vs. Private Sector
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Expanded Earnings Function
Individual (log) wages depend on:
Formal schooling
Labour market work experience
Unobserved ability or luck
Other characteristics
Ln Yi= α + rS + β1EXP + β2EXP2 + γXi + εi
Where:
Y = Earning; α = Fixed component of wage with no schooling; r = i = internal rate of return; S = Years of schooling; EXP = Experience (Age as a proxy); ε = unobserved ability or luck
Coefficients on schooling (r), experience (β), and other characteristics (γ) can be interpreted as their rates of return
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2006 Census
Pure regional wage differential
Occupational premiums
Industry premiums
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Earnings Differentials by Province, 2005
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Earnings Differentials by occupation 2005
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Earnings Differentials by Industry 2005
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Theoretical Issues
Compensating differentials
Immobility across sectors
Short run vs. long run
Unobserved heterogeneity
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Occupational Wage Structures
The wage structure between various occupations or occupation groups:
National Occupational Classification (NOC)
Occupation (definition)
26 two-digit major groups
17 occupational classifications
520 four-digit codes (in the 2001 NOC)
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Occupational Wage Differential
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Ss
Ds
Su
Du
Skilled Labour
Unskilled Labour
Ws
Wu
Ns
Nu
Skilled employment
Unskilled employment
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Interoccupational Wage Differentials
Compensation for:
Nonpecuniary differences
Human capital investment
Endowed skills
Short-run adjustments:
Demand factors
Noncompetitive factors:
Occupational licensing, regulation on entry, unions and legislation on wages
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Regional Wage Structures
Reasons:
Geographic preferences
Compensating differences
cost of living, remoteness, climate, non-price externalities, pollution, congestion
Short-run factors
induce mobility to encourage long run equilibrium
Noncompetitive factors
cost of moving, artificial barriers and public policies (e.g. occupational licensing)
Social Transfer and Regional Expansion Programs
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Migration Decision
Geographic mobility will occur if marginal benefit exceeds marginal costs
Factors influencing mobility:
Age
Unemployment rates
Business cycle
Distance
Cultural differences
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Interindustry Wage Differentials
Theoretical Determinants of Interindustry Wage Differentials
Average industry wage reflects a variety of factors:
Occupational composition
Personal characteristics
Regional domination
Pure industry wage differentials are difficult to calculate
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Interindustry Wage Differentials
Nonpecuniary aspects:
unpleasant or unsafe work conditions, seasonal or cyclical employment
Short-run demand factors:
reallocation, technology change, free trade, and global competition
Noncompetitive factors:
monopoly rents, wage laws, unions, and licensing
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Efficiency Wages
Firms may pay wages above market rate to:
Improve morale
Reduce turnover
Elicit effort
Discourage unionization
Establish queue of applicants
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Efficiency Wages
Productivity-enhancing wages
Payment of efficiency wages may differ by industry
Voluntarily paid by the firm
Rationale for policies designed to protect “good jobs”
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Efficiency Wages, Empirical Evidences and the Impact of Deregulation
The interindustry wage structure tends to be quite stable over time and across different countries.
Industries that are subject to greater competitive pressures on the product market (e.g., import competition, deregulation, more competing firms) tend to pay lower wages.
The evidence also suggests the existence and persistence of pure interindustry wage differentials or rents that are consistent with the payment of efficiency wages.
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Interfirm Wage Differentials
Nonpecuniary factors:
Poor working conditions
Short-run demand changes
Noncompetitive conditions:
Monopoly position in the product market
Union in the labour market
Efficiency wages
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Public Sector Employment, Canada, 1981–2010
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Public vs. Private Sector Wage Differentials
Nonpecuniary factors:
job security, fringe benefits, and political visibility
Short-run factors:
reflect a short run disequilibrium
Noncompetitive factors:
political constraint, monopsony, inelastic demand, and unionization
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Summary
Different dimensions of earnings differentials
Occupation, region, industry, and public vs. private sector
Sectors wage differentials and labour mobility
Efficiency wages
Theoretical determinants of public vs. private wage differentials
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