Differences in Wages:Compensating Differential and Human Capital
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Alright, so now let's consider some of the reasons why different jobs might pay different amounts of money or even people working in the same job might be making different amounts of money, let's see why? So not all jobs are created equal, right? Some jobs are going to be easy, some are hard and some aspects of a job may be unpleasant. Okay, so this first reason why we might see a difference in wages, the compensating differential and this rewards a worker for taking a less pleasant job. Okay. Less pleasant could mean any number of things. One good one good example is a construction worker. Construction worker takes on say riskier job right there working with heavy machinery, heavy labor, right? Physical physical labor that they have to do all day and they're working in, you know, tall buildings. So they're taking a riskier job, they're gonna have to be compensated for that. Right? So that's gonna be a higher wage based on that riskiness. So let's take on this kind of silly example. Here I've got we've got nice guy, nick and Angry Andy are the two guys who own a flower shop in this town. And you could imagine that everything is gonna be the same about both of their flower shops. Except for the management management at angry Andy's shop while he's angry, he yells at you all the time. So it's more unpleasant to work for angry Andy. Right? So you might see that nice guy nick might be able to pay a wage of $10 an hour where angry Andy might have to pay 12 an hour because people you have to put up with his anger. Right? So you might think if you had to pick if you had the choice to work for nice guy, nick or angry Andy Well now you'd have to make a decision. Is it worth the extra $2 an hour to put up with angry Andy? Well, that's the compensating differential, right? Those extra $2 that's the compensating differential for this unpleasantness at the job. Okay, so this this is kind of a silly example, but you can see how it works here. Alright, so let's go on to the next one here. Human capital. So we've talked about human capital before, right? This is one of the factors of production here and human capital? Well, it represents the education and training of the workforce, right? They're going to be more productive when they're more educated and they have more training. So you can imagine if you have higher human capital, if you've gone to college, if you've gone to a technical school, something like that. Well, you're gonna get a higher wage, right? Because you have some education, you have some training and the opposite, right? You've got lower human capital. Well, you're gonna get a lower wage. Right? Okay. So that was pretty simple, pretty straightforward. Why don't we stop right here? And in the next video, we'll go over another couple of examples of why there might be differences in wages. Alright, let's do that now.
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Differences in Wages:Efficiency Wages and Superstars
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Alright. So another reason we might see a difference in wage is that the employer purposely pays a wage above equilibrium. So they know the equilibrium wage, but they're gonna purposely pay above that as an incentive to the employee, okay, it's gonna be an incentive to the employee to work harder to be more productive. Okay, A wage above the equilibrium. So this this wage that this employers paying as an incentive, we call it an efficiency wage right there. They're paying that wage because they want more efficiency out of their, out of their employees. Cool. Alright. So let's kind of follow the logic of what's happening here in the employee's mind. Well, if they have a efficiency wage job, say they're paying $15 an hour when the equilibrium wage is $10 an hour, Well, the opportunity cost of losing the job is higher, right? You have a higher opportunity cost of losing this efficiency wage job, because if you have lost this job now, you're losing 15 an hour rather than 10 an hour. So you you want to hold onto the job a little more because of that reason, and it likely follows that if you're fired from this efficiency wage job, well, you might have to accept a lower paying job, right? You might not be able to find another efficiency wage job. And you can imagine that these efficiency wage jobs, it allows the employer to have more people coming to them, right? They're paying above equilibrium. So you can imagine they're gonna have a surplus of supply, a lot of people coming to them, and they can pick the best employee. Alright. So in this sense, the workers are going to be motivated to perform well, to avoid being fired. Okay, So that efficiency wage, it gets the workers to be more efficient. Cool. Alright. The last one here where we're gonna talk about on this page is superstars. So how do superstars make so much money? Right? If you think of professional athletes or movie stars, music, music stars right? There are making tons of money, But how are they making so much than other jobs? Well, it depends on the demand for the good being sold, right? The good being sold, It's gonna show what the wage is gonna be for the people producing the way producing the good. Remember that demand for labor is derived from the good being produced, right? We have the derived demand. So, let's first think about professional athletes. Well, professional football players, they create football games, right? That's the good. The good is the football game, and the professional football players create that game, and those games can be sold at a very high price, right? They fill arenas, sell lots of tickets, sell merchandise is and that there's a lot of money to be made off of these professional football players. But what you're gonna see is that the supply of professional football players is low, right? There's not so many people qualified to play in professional football, but the demand for these football players is really high, right? So with this high demand, low supply, you can imagine that the equilibrium wage can get really high up there, especially with the product being sold for tons of money, just like football games are Okay, Now, let's compare that to a high school teacher. Well, high school teachers, they create educational products and those products are sold at a very low price. Right? So, the football games are sold at a really high price, but the educational products usually sold really low. Right? When you think about a high school, well, they're usually funded by the government, right? There's not tons of money going into this. So, the supply of high school teachers, people qualified to teach high school. Well, there's a much higher supply of these high school teachers, and the demand for high school teachers comparatively is going to be low. Okay, Because there's such a high demand and we're going to see that the equilibrium wage for high school teachers, well, it's gonna be uh much lower than the equilibrium wage for professional football players. Okay, So they're working in different markets with different goods being sold. All right, so, that's about it. For this page, we're gonna talk about um one more topic of differences in wages, and we're gonna talk about discrimination. Alright, So, let's see that in the next video