Why wages vary - Why some of us get paid more than others

I'm Alaya.
Did you know that some people earned big money, even
six figure salaries, diving for golf balls.
You mean like scuba diving.
Yeah, So golf balls are really expensive, and so when
a golfer shanks it into the lake, we got something
valuable waiting for them. So fishing out those golf balls,
cleaning them up, and reselling them is a big business.
Personally, I think I'd let the alligators keep the balls
before I dive into Florida waters surrounding golf courses searching
for balls. It sounds like risky work.
It is golf ball divers, and they exist. They report
frequent encounters with snapping turtles, snakes, and even alligators.
Risk is something that factors into how much people earn. Today,
we're going to dig into all the factors that add
up to determine how much people are and what they're
paid for their work. On this episode of Think Like
an Economist with Me Betsy Stevenson and I'm.
Just a Morphers. This is the podcast where we teach
you some of the exceptional tools from economics so you
can transform your life. Nestra and Tabercoli Faris with us.
This is a really exciting episode because it's going to
help us answer, or at least understand a question a
lot of us have, and that is why do some
people earn more money than others? I think many of
us want to earn more, so there'll be a lot
we can apply to our lives.
Yeah, I think like an economist, we're going to take
credit for every listener who manages to boost their income
after applying the lessons from today's episode.
Now, you're not going to be surprised that supply and
demand are important determinants of why some people earn more
than others.
I'm not surprised. I thought you'd say that, But I
do sometimes get confused because I usually think of myself
as a demander of all the things I buy. But
on the labor market side, I am the supply of labor,
and I'm deciding whether to supply my skills and ability
to do a job.
One of the main factors determining how much you'll get
paid is how much you need to be offered to
be willing to do a job. So the supply side
is related to the characteristics of a job and an
important factor that shapes whether any of us want to
do a job is how much fun it is or isn't.
I used to dream of being a chocolate taster.
My daughter wants that job too, and it does exist
as a job, but it's not easy to get hired,
and it doesn't pay very well, at least not until
you've gotten a lot of specialized training in chemistry and
food science.
In the US, the average wage of a high school
graduate is around thirty thousand dollars a year, but there
are a lot of jobs where you can earn more.
One job for high school grads is a makeup artist.
It's a great job for someone who has a lot
of talent with makeup, and if you work on movie
sets or television studios, you can meet famous or at
least interesting people.
Or you can take a different path and enjoy peace
and quiet by doing the makeup of dead people.
Justin that's awful.
That's the point, Naz. Someone has to do the makeup
of dead people for an open casket funeral. More generally,
someone has to prepare people after debt for a funeral.
This job, we call it a mortician, is generally seen
as a more unpleasant job than that of a putian.
Morticians get what economists call it compensating differential, which is
the boost in wages that are needed to offset the
undesirable aspects of a job, meaning that the difference in
pay between doing the makeup of living people and dead
people is partially determined by the fact that most people
prefer to work on living people.
So the compensating part refers to the fact that this
extra wage compensates you for the attributes of a job.
Differential refers to the fact that people with similar skills
are earning different wages.
We see compensating differentials in all parts of the labor market.
If you work a night shift at a hospital, you
usually get paid more because working nights can pretty much
ruin your family and social life.
Or lawyer law firms work really long hours, which also
isn't great for your personal life, and so they tend
to make a lot more money than those who work
for the government or as in house counsel at a company.
Jobs with undesirable attributes pay more, or you can say
that jobs with desirable attributes pay less.
Now as you're a journalist and you also studied economics,
now journalists don't make much money. People with economics degrees
are among the most highly paid graduates, as they can
go into really lucrative careers like banking. So you had
the chance to make a ton of money.
Justin Are you trying to say that I blew it?
No, I didn't mean that.
Yeah, you're right. I could have made a lot of
money if I went into banking, and a lot of
my classmates actually did do just that. But as a student,
I got involved in the student paper and I absolutely
loved it. Being a journalist gives me so much joy,
and I actually really believe it's an important job in society.
So I'm more than happy to be a journalist, even
if I could be earning way more money as a banker.
And so the point. Compensating differentials lead to a lower
wage in some jobs because workers like you nas are
essentially paying for the really pleasant parts of their job.
That sounds a lot like journalism.
Let's zoom out a little, because whether your paid a
compensating differential or not doesn't depend on you, but it
depends on the preferences of the other workers and how
they viewer job's attributes.
Think back to those golf ball divers. Most people don't
want to dive into swampy snake infested waters to fish
out a golf ball. The higher wage is a reflection
of how the market views a job's attributes.
Here we see the interdependence principle.
Right. Your opportunities are shaped by the choices of others.
You might think that diving for golf ball sounds fun.
If that's you, then I've got a great job for you.
The fact that other people don't want to do it
means less supply of labor, and when there are fewer
available workers allow zequal wages are going to be higher.
So in this way, having a unique preference can be
a real asset for you in the labor market.
This gives you real career advice. You want to think
about your tastes relative to the taste of other people.
Try to find a job where either you enjoy it
a lot more than other people, or you dislike the
bad aspects less than others do.
So that's supply, But I mean, how many golf ball
divers does the world need? Demand has to be important
here too.
Right, So you're pointing to a really important point about
labor demand. It's what we call a derived demand because
it's derived from the demand for whatever you're producing. So
it's the value of those submerged golf balls that ultimately
caps how much a worker can earn. After all, no
one is going to pay more for refurbished golf balls
than they would pay for new ones.
And the more balls you can gather, which is another
way saying, the more productive you are at harvesting sunken
golf balls, then the more you can earn.
Yeah, I've read that one golf ball diver reported earning
millions of dollars a year, but I think that's a
tool tail because it would require them to gather over
five thousand balls a day, three hundred and sixty five
days a year.
It sounds like an exaggeration to me, but it helps
demonstrate how important productivity is. The number of balls you
gather in a day is a measure of your productivity,
and the higher that number is, the greater your potential earnings.
The point is that a big factor that determines how
much you can earn and what employers are willing to
pay you is people's willingness to pay for what you produce.
So if you want to get a higher wage, you
need to convince your boss you bring a lot of
financial value to their company through your output.
I want to be clear, though, because sometimes economists gets
sloppy with language and they talk about what people are worth.
Wages are not worth, but they do reflect other people's
willingness to pay for whatever it is that you're producing.
Okay, now we've cleared that up. Let's talk about what
makes people more or less productive.
Economists talk about human capital as the accumulated knowledge and
skills that makes you more or less productive. Just like
physical capital is the machines that make stuff, human capital
is the human talent that allows us to make stuff.
The bottom line is that businesses pay workers for their skills,
which is their human capital. The more human capitual you have,
the more productive you will be, and so the more
you'll get paid.
Right, and education is really critical when it comes to
building your human capital. Regardless of which subjects you study,
you'll learn all sorts of skills that will make you
a more productive worker, such as learning how to communicate
better and how to solve problems.
People with college degrees, on average, earn a lot more
than those without a college degree.
That's right, but it's not just about college. Research shows
that every year of education builds human capital from early
childhood education on up, and it applies to on the
job education like apprenticeships too.
When it comes to college, though, the gap and earnings
is pretty big.
And that gap has grown over the past several decades.
I looked up the data and the media, and high
school graduate without a college degree earns thirty thousand dollars
a year, meaning roughly half earn less and half e more.
But for college graduates, the median annual earnings is fifty
thousand dollars.
Over the course of their career, a college graduate will
earn over a million dollars more on average than a
typical high school graduate, and people.
Who stay in school longer to get professional degrees, such
as lawyers and doctors, earn even more money.
I also like to tell my students that among those
with a college degree, those who major in economics earn
some of the highest wages in study after study. Just
listening to this podcast is building valuable human capital.
Education plays a huge role on how much you'll earn
for two reasons. The first is that it builds your
human capital and therefore makes you more productive. That's what
we've been talking about.
Second, education can also help you get hired by signaling
say that you're tenacious.
Employers want to find the most productive person they can
someone who will work hard, be a good team player,
and overall generate a lot of value for them.
Their problem is it can be hard to figure out
just from talking to someone whether they're tenacious. You know
they're going to tell you they are, and they have
a bunch of other virtues. Everyone's going to say that
in an interview.
I remember that cliche interview question where you're asked to
state your biggest weakness, and people say things like I
work too hard and struggle to take time off for
my family and friends, or I'm so detail oriented, I
never let things go right.
So how do you know they're being honest? For employers,
your education tells them in a credible way that you've
done something hard. You worked hard in school, you were tenacious,
you accomplished your goals.
You weren't just saying it. You're showing that you have
the tenacity and commitment to accomplish your work. They're hoping
you'll bring what it took to get through college to
their workplace. College being hard is exactly the point.
Economists say that education serves as a signal, which is
an action that credibly gives them information would otherwise be
hard for them to verify. In this case, an employee
needs some sort of evidence that you're tenacious, and having
a college education is one way of proving this to them.
It sounds like these are two conflicting ideas about what
education does. One is that it makes you more productive
you gain actual useful skills. The other is that it
just proves to employers that you have the skills you
had all along, like tenacity.
These are conflicting ideas, and both can be true. Education
can give you real skills that will make you more productive.
I think learning economics will make you more productive in
a lot of jobs. You can get some of those
skills from listening to this podcast, but you.
Can't put podcasts listening on your resumet, so it doesn't
work to generate the signal that a degree or other
credential would.
Those signals can be really important in landing a job,
particularly your first job.
But the skills you get, the increased productivity, that's what
will help you get raises through your career as you
build on those skills and demonstrate your high productivity.
Okay, let's change our focus. The more labour supply there is,
the lower the wage, but the more labor demand, the
higher the wage, and vice versa. So clearly, labor demand
and supply play an important role in deciding how much
you'll earn. But what else matters.
Institutions can impact how much you earn, and by institutions,
who are in the rules and regulations that affect the
labor market. In the world of.
Work, an occupational license is a set of rules that
determines who's allowed to work in an occupation. This is
pretty important. I mean, you can't just decide to work
as a doctor.
Licensing laws are there often to ensure safety for consumers.
I mean, you wouldn't want to be operated on by
a surgeon who isn't fully trained and could do you harm,
or have your house rewired by an electrician who doesn't
know what they're doing could create a fire hazard.
The problem is that occupational licensing has really grown beyond
these ideas. You see licensing low as the labour supply
because it keeps some people out, and that's good for
those who remain in that occupation, because less labor supply
means higher wages.
Back in the nineteen seventies, only about one in twenty
workers needed a license to do their job, and today
more than one in three do. Often, licenses are a
bit silly, like requiring thousands of hours of training before
letting someone breed hair for pay.
My favorite is in Florida, interior decorators have to be
licensed because you never know the damage it will be
done by a misplaced throw pillow.
Another important regulation is the minimum wage.
A minimum wage is a price flow. In the US,
you're not allowed to pay anyone less than seven dollars
twenty five per hour.
In some labor markets, the equilibrium wage might be above that,
so the minimum wage doesn't have much to an effect,
but in other labor markets the equilibrium wage would be lower.
In this case, we end up with unemployment, as more
people are wanting to work at the minimum wage than
there are businesses wanting to hire them.
The minimum wage is a very hotly debated topic, with
some people arguing that higher minimum wages will lead to
unemployment and others saying a minimum wage ensures that people
can make a fair wage which they can realistically live on.
Research shows that the impact of a minimum wage really
depends on how high it is and how many workers
it'll affect.
The types of minimum wages that we tend to see
in labor markets are such that there are pretty small
effects on overall employment, but they can affect who gets hired.
Higher wage can lead to fewer employers being willing to
hire young people, for example, because young people tend to
be a little bit less responsible and therefore less productive.
It's one reason some countries have a separate and lower
youth minimum wage.
We haven't really talked about worker bargaining at all, but
I'm guessing that unions can have a big impact on wages.
Yeah, unions increase the wages of their members, and on average,
unionized workers earn ten to twenty percent more than similar
workers doing similar jobs who aren't unionized.
And unions can reduce inequality because they often result in
a smaller gap between the highest and lowest paid workers
in the company.
Yeah, unions are really powerful in some professions and industries,
such as with teachers, nurses, and transportation workers. Now, given
unions increase the wages of workers, bosses aren't big fans
of them.
Now as I think you're right, but it's not always
a great move on the part of management, because while
unions can lead to higher wages, they also can help
ensure better communication between management and workers. And when managers
and workers communicate more, this can mean that things are
done more efficiently, which means that workers are more productive,
and at the end of the day, that can boost profitability.
We're looking at why some people earn more money than others,
and so far we've looked at labor supply and labor demand,
as well as the role of institutions, but we haven't
discussed discrimination, and I think that's an important factor.
Right in the US, there are statistics showing that white
people earn more money for the same job compared to
their colleagues who are black or a Hispanic, and men
still earn more money than women, often for the same work.
So justin you just said for the same work. But
I think that's asking too little of discrimination because discrimination
builds over time, so I still call it discrimination. If
a woman has left an occupation like economics or computer
science because she's experienced a hostile mail work environment, it's
no longer the same work, but discrimination is playing an
important role in her wages.
I hear what you're saying Betty. So if a person
of color gets passed over for promotion because the team
deciding it just feels better connection with the white candidate,
then they're going to be on a lower track forever.
Ten years later, they're not going to be doing the
same work. But that's because of discrimination, and that discrimination
means they're doing different work and getting lower pay.
Economists tend to put discrimination into three buckets. Prejudice, implicit bias,
and statistical discrimination.
Prejudice is when we're biased against a group of people
which is not based on reason or experience.
Not only is that entirely unfair, but prejudice is not
good for a company's bottom line. You know, if a
company's prejudiced against LGBTQ people, well then they'll have a
smaller pool of workers to choose from.
The company's effectively decreased the labor supplies willing to look at,
and therefore it will increase the wage. They've ruled out
some potentially very talented workers who are now not going
to get the job because the employer was prejudiced against them.
Implicit bias is when we make judgments based on unconsciously
attributing certain qualities to a particular group of people.
Someone may not hire a man to teach children, even
if he's excellent at it, as the boss may have
an implicit bias that men aren't very nurturing.
Women often get shut out of positions due to implicit
biases that men are more aggressive and so we'll do
a better job.
Negotiating implicit bias can be really hard to tackle, as
often we're not even aware of our biases. As a boss,
it helps to hire candidates based on really carefully structured
assessments rather than going on the gut feelings of who
you think will do a better job, because you gut
might be biased.
The third type of discrimination that economists have focused on
is statistical discrimination. This is when statistics about average performances
for a group will influence how someone judges an individual. Basically,
when people are missing information about the individual, they fill
in the missing blanks with averages from the group. Effectively,
they're relying on stereotypes.
You haven't brought up structural racism or institution discrimination. We
talk about these things a lot today.
Yeah, these are big ideas that economists are just now
starting to grapple with.
That our racist history shaped the institutions we designed in
a way that's still having an effect on the labor
market today.
So take the design of the unemployment insurance system in
the United States.
So when unemployment insurance was first created, it excluded certain
workers like agricultural workers.
Now, Betsy, I have a guess they're particular groups of
workers in those areas.
Yeah, by virtue of their occupations. About two thirds of
black workers at the time were not included in unemployment insurance,
compared with only a quarter of weight workers.
And so you're saying that our unemployment insurance system was
designed in a way to largely exclude African Americans.
That's right. I think people still think that's playing a
role today and the kinds of support people get when
they face unemployment.
The big idea here is that even if people aren't
discriminating today, the shadow of history still means that markets
can yield discrimination.
There are lots of examples of that that if you
start to dig in and you ask yourself, why do
we do things a certain way, you'll see that it
comes out of our discriminatory past. And that's actually pretty
tricky to get rid of, just like implicit biases. And
I think that's why economists are just starting to figure
out how to make sense of it.
What are some things we can think about over the
next few weeks to really get to grips with all
of this.
Well, the first thing we talked about was compensating differentials,
and you know, that's a reminder that you need to
think about what makes you unique, your unique preferences that
might give you an edge in the labor market. Maybe
because there's something you love more than anyone else and
you'll get all those benefits of doing something you truly
love without sacrificing a.
Lot and pay.
Or maybe it's something that you dislike less than anyone
else and you can take that unpleasant job and get
the higher pay for it.
Second was the idea that labor demand shapes how much
you learn, and employers demand highly skilled workers. That says,
if you want to get paid more, invest in your
education and skills.
The third thing we talked about is institutions, and they're
the best thing for you to do is make sure
you understand the institutions that govern the labor market you
want to enter.
And finally, we talked about discrimination. This is both a
really important social issue, but it's also an important business
issue because if people in your organization are discriminating, you're
not getting the talent and the labor supply that you
really need.
So when you think about discrimination, realize that you have
to dig a little bit deeper to understand what kind
of implicit bios you might have, or what kind of
ways our past has shaped our present that leads to
discriminatory outcomes.
Betsy Justin, that was great. I think we all now
have a better handle of what to do if we
want to earn more money.
And as I want to hear lots of stories about
you getting picked pay rises out there, mate, And remember
I told my listeners I'm taking full credit for every
pay rise you get.