Earnings, Productivity, and the Job Market

There are three major sources of wage differentials among individuals: differences in workers, differences in jobs, and degree of labor mobility Individual workers differ with respect to productivity (skills, human capital motivation, native ability, and so on), specialized skills, employment preferences, race, and sex. These factors influence either the demand for or the supply of labor. In addition, differences in nonpecuniary job characteristics, changes in product markets, and institutional restrictions that limit labor mobility contribute to variations in wages among workers.

Productivity is the ultimate source of high wages. Workers in the United States Canada, ,Japan, and other industrial countries earn high wages because their output per hour is high as the result of (a) worker knowledge and skills (human capital) and (b) the use of modern machinery (physical capital).

During the last two decades, the size of the U.S. work force has grown rapidly. This rapid growth in the labor force, coupled with a sagging rate of capital formation, has adversely affected the growth rate of  worker productivity and real compensation per worker-hour.

Approximately 80 percent of national income in the United States is allocated to human capital (labor); 20 percent is allocated to owners of physical (nonhuman) capital.

Automated methods of production will be adopted only if they reduce costs. Although automation might reduce revenues and employment in a specific industry, the lower cost of production will increase real in come, causing demand in other industries to expand. These secondary effects will cause employment to rise in other industries. Improved technology expands our ability to produce. It is expanded production, not the number of jobs, that contributes to our economic well-being.

Both employment discrimination and differences in employability characteristics (the quality and quantity of schooling, skill level, prior job experience, and other human capital factors) contribute to earnings differentials among groups. Economic research indicates that approximately half of the earnings disparity between whites and blacks is due to differences in employability (productivity) characteristics rather than employment discrimination.

In the mid-198O's, women working full-time, year-round, earned only about 65 percent as much as men. Some of this differential may emanate from discrimination in the labor market. However, differences between men and women in areas of specialization within the family may also contribute to the earnings differential.

Minimum wage legislation increases the earnings of some low-skill workers but others are forced to accept inferior employment opportunities, join the ranks of the unemployed, or drop out of the labor force completely. Minimum wage legislation reduces the ability of employers to offer (and low-skill employees to find) work with on-the-job training and skill-building experience. Thus, the jobs available to low skill workers tend to be primarily dead-end jobs. The minimum wage exerts its most adverse affects on the employment and training opportunities of teenagers, particularly minority teenagers.