Labor Markets and Discrimination
The price of prejudice
In April 1945, the Boston Red Sox held a tryout for three Black ballplayers. One of them was Jackie Robinson. The Red Sox never called him back.
Six months later, Branch Rickey of the Brooklyn Dodgers signed him. Robinson took the field in 1947, endured abuse that would have broken most people, and was named Rookie of the Year. With Robinson, Roy Campanella, and Don Newcombe in the lineup, Brooklyn won six pennants in the next ten seasons. Boston, which had won the pennant in 1946, didn't win another until 1967. It was the last team in the majors to put a Black player on the field, in 1959.
Rickey's decision took moral courage. It was also very good business. For half a century, the Negro Leagues had been full of players good enough for the majors, and every owner who turned them away was paying for it, in wins, in tickets, and in money. One economist later estimated that the typical team gave up about $2 million in 1950 dollars, more than $19 million in 2010 dollars, just by integrating slowly. Some owners paid that price for more than a decade.
Are economic policymakers responsible for solving racism? Hardly. That work belongs to the moral consciences of citizens engaged in the political realm. But economics does teach us a powerful lesson: under the right conditions, free markets will tend to reward firms who hire the most competent people, independent of race, sex, or creed. Put differently, those who choose to discriminate will have to pay the price of it.
Labor-Market Equilibrium and Shifts
Chapter 12 showed how one firm decides how many workers to hire: up to the point where MRP equals the wage.Ch 12 But where does the wage itself come from? From a market. Firms looking for workers make up labor demand; people looking for work make up labor supply; the wage settles where they meet. Each small firm then takes that wage as given. It is the same split you met in Chapter 10 for output prices: the market sets the price, and the firm decides how much to buy at it.Ch 10
Labor demand shifts when anything changes the MRP of workers at every quantity: demand for the output, the output's price, or the workers' productivity. Capital and technology cut both ways. A machine that replaces a task, like a self-checkout lane, can reduce demand for the workers who did it. A tool that complements a worker, like better diagnostic equipment for a nurse or better software for an accountant, raises her marginal product and increases demand for her.
Labor supply shifts when the number of people willing and able to do the work changes: population and immigration, the cost of training, the wages offered in other jobs, working conditions, and legal requirements to enter the occupation.
| Labor demand shifts right when… | Labor supply shifts right when… |
|---|---|
| demand for the output rises | more workers enter the area (population, immigration) |
| the output's price rises | training becomes cheaper or faster |
| workers become more productive | wages in other jobs fall |
| complementary capital improves | working conditions improve |
| a technology makes the skill more valuable | licensing barriers fall |
Quick check New software makes paralegals much more productive, and firms still need people to run it. What happens to demand for paralegals? ▸
Retrieval practice Draw the labor-market graph and show what happens when demand for the output rises. ▸
Wage on the vertical axis, quantity of labor on the horizontal, an upward-sloping supply curve and a downward-sloping demand curve. Higher output demand raises MRP, so labor demand shifts right. The equilibrium wage and employment both rise.
Why Wages Differ
If the wage is set by supply and demand, then wages differ for the reasons any prices differ: what the next unit adds, and how scarce it is. A handful of reasons do most of the work.
Human capital. Some workers have more human capital, so their next hour adds more. A welder who can read blueprints, a nurse who can run a ventilator, an accountant who knows tax law: each produces more per hour than someone without those skills, so firms will pay more for that hour. Education is the most visible investment in human capital, and its payoff is large.
Signaling. A degree may also pay because of what it signals, not just what it teaches. An employer can't see your persistence, reliability, or ability on a résumé, but she can see that you finished a demanding four-year program, which is hard to do without them. The economist Michael Spence won a Nobel Prize in part for working out this logic. Evidence that a diploma pays more than the extra year of school it takes to earn it (sometimes called the sheepskin effect) suggests signaling is real. Economists still argue about how much of the college payoff is skill and how much is signal. Either way, the degree pays for the student. The difference matters for policy: if a degree is mostly a signal, subsidizing more of them buys less for society than it seems to.
Compensating differentials. Some jobs pay a compensating differential because they are dangerous, isolated, exhausting, or done at night. Commercial fishermen and oil-rig workers earn more than warehouse workers with similar skills partly because few people want those jobs at ordinary pay. The reverse is true too: people accept less to do work they love.
The price of flexibility. The same logic explains most of today's gap between men's and women's pay. Women who work full time, year round, earn roughly 83 cents for every dollar men earn. Claudia Goldin, who won the Nobel Prize in economics in 2023, showed that most of that gap does not open at hiring. Men and women with similar training start out paid about the same. The gap opens later, mostly after the first child, and mostly within occupations rather than between them. Her explanation is nonlinear pay: in many high-paying jobs, a person available for long, unpredictable hours earns far more per hour than a person who needs predictable ones. Flexibility is a job feature, and in those jobs workers pay a steep price for it, a compensating differential running in reverse. Whoever takes on more of the caregiving pays that price, and it is usually the mother.
Economists Francine Blau and Lawrence Kahn broke the gap apart factor by factor, using data from 2010, when women's hourly pay was about 79% of men's. Differences in occupation, industry, and years of work experience together account for roughly two-thirds of it. Education pushes the other way: women now have more schooling than men on average, which on its own would put them ahead. About 38% of the gap is left unexplained by anything the researchers could measure, and some of that may be discrimination.
Two cautions keep the numbers honest. An "explained" gap is not automatically a fair one: if women sort into lower-paying occupations because those jobs offer the predictable hours caregiving demands, the occupation numbers are Goldin's story, not the end of it. And the pieces that explain the most, where people work and how continuously they have worked, are exactly the ones nonlinear pay predicts.
Goldin's favorite counterexample is pharmacy. Shared computer records and standardized drugs mean one pharmacist can step in for another, so a part-time pharmacist earns about the same per hour as a full-time one. Pharmacy became, in her words, among the most egalitarian of all professions. That is a firm-level solution: when firms make flexibility cheap, the gap shrinks.
Ask teachers what would make the job better, and higher pay is near the top of the list, for good reason. But when researchers make teachers choose between realistic job offers, some working conditions turn out to be worth as much as a sizable raise, or more.
England. A 2020 study of 2,210 teachers found that the option to move to part-time work was valued like a 4.3% raise, and each 1% cut in workload like a 0.8% raise. Working in a school where a few students seriously disrupt most lessons would take a 26% raise to make up for.
United States. A 2024 study of 1,030 teachers found they valued access to support staff (special education specialists, counselors, nurses) more than a 10% raise, and treated a childcare benefit and a 10% raise as nearly interchangeable. Another study found that a principal who backs teachers on discipline was worth about $8,670 a year to them, roughly 17% of base pay.
That is Goldin's lesson applied to a school district. A district with a fixed budget might keep more good teachers by redesigning the job, not only by raising the salary schedule: shared lesson plans and co-teaching so one teacher can step back without the class falling apart, job-sharing and part-time contracts, protected planning time, childcare, and real support on behavior. Two cautions: these are answers to carefully designed survey choices, not observed behavior, and none of them means pay doesn't matter.
A gap in average pay between two groups is not explained by one slogan. Economists ask which mechanisms are at work: differences in human capital; occupation and industry; hours and flexibility; caregiving responsibilities; taste-based or statistical discrimination (Concepts 5 and 6); monopsony and bargaining power; and networks and workplace norms. Some of these change MRP, some change labor supply, and some change who gets access to which jobs. The point is to ask better questions than "Is it all fair?" or "Is it all discrimination?"
Scarcity and superstars. The lowest-paid player in the NBA earns more than a million dollars a season. The average American public-school teacher earns less than a tenth of that. Ask almost anyone which job matters more, and the teacher wins easily. It is the diamond–water paradox again.Ch 2 The total value of teaching is enormous, like the total value of water. But a wage is set at the margin, by what one more hour adds and how many people can supply it. Millions of people can be trained to teach well. Almost no one can play in the NBA, and a single game is sold to millions of viewers at once, so one more hour from a rare player adds a great deal of revenue. Economists call this the superstar effect. One honest caveat: most teacher pay in the United States is set by public budgets and union contracts, not by employers bidding against each other, so the competitive model explains it only loosely.
Common misconception "Wages measure what a person is worth." ▸
A wage is a market price for an hour of a particular kind of work. It reflects what that hour adds to some firm's revenue and how many others could supply it. It does not measure effort, kindness, courage, intelligence, or a person's full contribution to the people around them. Effort matters, skill matters, luck matters, and so does bargaining power, but none of them line up neatly with moral deservingness.
A free society treats people as equal in dignity even when markets pay very different prices for different kinds of work. The model explains why wages differ. It does not tell us who matters.
Quick check Oil-rig jobs pay more than warehouse jobs that need similar skills. Give one economic reason. ▸
Quick check According to Goldin, why does the gender pay gap widen after the first child? ▸
Quick check A student says, "If college is mostly a signal, it's a waste of money." What's wrong with that reasoning, for the student? ▸
Retrieval practice Name four reasons wages differ, with an example of each. ▸
Human capital (a nurse trained on ventilators adds more per hour); signaling (a degree shows persistence an employer can't see directly); compensating differentials (oil-rig workers paid extra for danger); scarcity and superstars (a rare athlete sells to millions at once). All four work through MRP or labor supply.
Monopsony
The competitive model makes a precise prediction. An employer can't pay a worker more than her MRP for long, because it would lose money on her. And it can't pay her much less than her MRP for long, because another employer would hire her away. Competition between employers pushes wages toward MRP.
That second half depends on there being other employers. Picture a town where one hospital employs nearly every nurse. That is a monopsony, from the Greek for "one buyer": the mirror image of a monopoly's one seller. A monopsonist is not a wage taker. To hire more nurses, it has to raise the wage, and usually it has to raise it for every nurse it already employs, not just the new one. So the cost of one more worker is her wage plus the raise for everyone else. MRC is above the wage, and the MRC curve lies above the labor supply curve.
| Workers | Wage (supply) | Total cost | MRC | MRP |
|---|---|---|---|---|
| 1 | $8 | $8 | $8 | $28 |
| 2 | $10 | $20 | $12 | $26 |
| 3 | $12 | $36 | $16 | $24 |
| 4 | $14 | $56 | $20 | $22 |
| 5 | $16 | $80 | $24 | $20 |
| 6 | $18 | $108 | $28 | $18 |
Read the table row by row. To hire a fourth worker, the employer must raise the wage from $12 to $14 for all four, so total labor cost rises from $36 to $56. The fourth worker's MRC is $20, though her wage is only $14. She adds $22, so she is worth hiring. The fifth would add $20 but cost $24. So the monopsonist hires 4 workers, where MRP and MRC meet, and then pays the lowest wage that will attract 4 workers: read off the supply column, $14.
Compare a competitive market, where employers bid until the wage equals MRP. In the table that happens at 6 workers, where the wage and MRP are both $18. The monopsonist hires fewer workers (4 instead of 6) and pays them less ($14 instead of $18). The workers it doesn't hire would have added more than they needed to be paid, so that value is lost to everyone: a deadweight loss, just like the one from monopoly.
Pure company towns are rare today, but monopsony power doesn't need one. Researchers find that many local labor markets are dominated by a handful of employers, and anything that makes it hard to switch jobs has a similar effect: moving costs, specialized skills that only a few employers use, and contracts that forbid working for a competitor. The cure the model suggests is the free-market one: more employers competing for the same workers. In a true monopsony, even a minimum wage set between Wm and Wc can raise both the wage and the number of workers hired, because it takes away the employer's reason to hold hiring down. Chapter 14 weighs that against the evidence.Ch 14
Monopsony is one way real wages drift from MRP, but not the only one. Search takes time. Some workers can't afford to move. Licensing rules, the barrier to entry from Chapter 11 applied to workers, can push wages above MRP by keeping others out.Ch 11 Unions and contracts can push either way. And discrimination can push a group's pay below what it adds. That is the rest of this chapter.
Quick check A monopsonist hires 4 workers, where MRC = MRP = $22. The supply curve says 4 workers will work for $14. What wage does it pay? ▸
Quick check Compared with a competitive labor market, what happens to employment and the wage under monopsony? ▸
Retrieval practice Explain why a monopsonist's MRC curve lies above the labor supply curve, and what a second large employer moving to town would do. ▸
To hire one more worker, the monopsonist must raise the wage for all its workers, so the extra cost is the new worker's wage plus the raise for everyone else. A second employer competes for the same workers, pushing the wage and employment toward the competitive outcome, where the wage equals MRP.
The Minimum Wage
A minimum wage is a price floor on labor, the same tool Chapter 4 applied to milk.Ch 4 Whether it does anything depends on where it is set. A floor below the market wage is non-binding: employers already pay more, so nothing changes. A floor above the market wage binds, and the competitive model predicts what binding floors always do. At the higher wage, more people want to work (Ls) and firms want fewer workers (Ld). Employment falls to Ld, and the gap between the two is unemployment: people willing to work at the legal wage who can't find a job at it. The workers who keep their jobs earn more. The workers who lose them, or are never hired, earn nothing.
Concept 3 adds a twist. Under monopsony, the employer holds hiring down so it doesn't have to raise everyone's wage. A minimum wage takes that reason away: below the floor, the employer can't pay less anyway, so each extra worker costs only the floor. In the hospital table from Concept 3, a $16 minimum means the hospital hires 5 workers at $16 instead of 4 at $14. A floor set between Wm and Wc raises both the wage and employment.
So the size of the floor matters as much as its existence. Economists talk about a minimum wage's bite: how high it sits compared with the wages local employers already pay. The federal minimum has been $7.25 an hour since 2009. In 2024 only about 1% of hourly workers earned it or less, because most states set higher minimums and most employers pay more than either. Across most of the country, the federal floor is close to non-binding. A $15 minimum is a different policy in Manhattan than in rural Mississippi: nearly non-binding in one, a big bite in the other.
That is the key to reading one of the most argued-over bodies of evidence in economics.
Few questions in economics have been studied as hard as this one, and the results genuinely conflict. Here are six landmarks.
Card and Krueger (1994). New Jersey raised its minimum from $4.25 to $5.05 in April 1992; Pennsylvania didn't. Surveyed 410 fast-food restaurants on both sides of the border, before and after.
Found: No job loss. New Jersey restaurants' employment rose about 13% relative to Pennsylvania's.
Neumark and Wascher (2000). Re-ran the New Jersey comparison using restaurants' own payroll records.
Found: Employment fell in New Jersey relative to Pennsylvania. Card and Krueger answered with government data showing little effect; the dispute became famous.
Cengiz, Dube, Lindner, and Zipperer (2019). 138 state minimum-wage increases, 1979–2016. Counted jobs that vanished below each new minimum and jobs that appeared just above it.
Found: The number of low-wage jobs stayed essentially unchanged over the five years after each increase.
Jardim and coauthors (2017). Seattle's rise to $13 an hour, using state records of low-wage workers' hours.
Found: Hours in low-wage jobs fell about 9%, and low-wage workers' earnings fell about $125 a month on average. A Berkeley team studying restaurants found no job losses.
Neumark and Shirley (2022). A review of U.S. minimum-wage studies.
Found: A clear majority of estimates are negative, most strongly for teens, young adults, and less-educated workers.
Congressional Budget Office (2021). Projected a federal minimum of $15 by 2025.
Found: About 17 million workers get raises and about 0.9 million people leave poverty; about 1.4 million jobs disappear (central estimate).
How do careful researchers get such different answers? Part of it is method: which comparison groups, which data, which workers count as affected. But much of it is the bite. The studies that find little effect mostly examine modest increases, in places where many employers already paid close to the new minimum: floors that were barely binding. The studies that find larger losses tend to look at bigger increases relative to local wages, or at the workers most directly affected, such as teens and people without a high-school diploma. A reasonable reading of the whole literature is that small increases have small effects on jobs, and that the risks grow as the floor rises further above what the local market pays.
Employers also adjust in ways a head count misses. They can cut hours, as in Seattle. They can hire more slowly, raise prices, trim training or benefits, or replace tasks with machines; a self-order kiosk is cheaper to justify when wages rise. Each of those spreads the cost to someone: workers who get fewer hours, customers who pay more, or applicants who never get the first job that would have taught them to work.
Finally, there is the question of who is helped. A minimum wage raises pay for the workers who keep their jobs, and the CBO expects some families to leave poverty. But it is a blunt tool for fighting poverty. Many minimum-wage workers are teenagers or second earners in households that are not poor, and many poor households have no one working at all. Chapter 14 compares it with tools aimed more directly at poor working families.Ch 14
A minimum wage near the market wage does little harm and little good. One far above it risks pricing the least experienced workers out of the first jobs that would have built their skills. Where employers have real power over wages, a modest floor can help. Before raising a floor, ask how far above local wages it will sit, and whether a better-targeted tool would do more for the people you want to help.
Quick check The market wage for dishwashers in a town is $16 an hour. The state raises its minimum wage from $12 to $14. What happens? ▸
Quick check In a competitive labor market, a binding minimum wage leads firms to want 400 workers while 700 people want jobs at that wage. How many are employed, and how much unemployment does the floor create? ▸
Quick check Why can a minimum wage raise employment under monopsony but not in a competitive market? ▸
Retrieval practice Explain why studies of the minimum wage reach different conclusions, using the idea of "bite." ▸
The effect depends on how far the floor sits above local market wages. Modest increases where employers already pay near the new minimum are close to non-binding, so studies find little job loss. Larger increases relative to local wages, or studies focused on the least-skilled workers, more often find lost jobs or hours. Market power matters too: where employers have monopsony power, a modest floor can raise employment.
Discrimination as a Cost
In 1957 a young economist named Gary Becker made an argument that sounded strange at the time. Treat prejudice, he said, like any other preference: something an employer is willing to pay for. An employer who refuses to hire qualified workers from some group isn't just being unfair. He is giving up profit to indulge a taste. Becker called this taste-based discrimination, and his work on it was part of what earned him a Nobel Prize in 1992. The baseball owners who passed on Negro League stars were paying exactly that kind of price.
Here is how the cost shows up. Suppose two groups of machinists, A and B, are equally skilled: each worker adds $30 an hour to any shop that hires her. If many employers refuse to hire group B, fewer firms bid for B workers, and their wage falls, say to $24, while group A earns $30.
| Firm | Hires | Wage | MRP | Profit per worker-hour |
|---|---|---|---|---|
| Prejudiced firm | Group A only | $30 | $30 | $0 |
| Open firm | Group B | $24 | $30 | $6 |
An open firm hires 50 group B machinists for 2,000 hours each a year. A prejudiced rival hires 50 group A machinists. Both groups add $30 an hour.
- The open firm earns $30 − $24 = $6 an hour more on each worker than the prejudiced firm.
- Per year: $6 × 2,000 hours × 50 workers = $600,000.
- The prejudiced firm gives up that $600,000 to avoid hiring equally good workers.
So Becker's model makes a testable prediction: where competition is strong, discrimination is expensive and should shrink; where firms are sheltered from competition, they can afford it longer.
Baseball. Andrew Hanssen (1998) found that in the early 1950s, teams with more Black players in the starting lineup won significantly more games, and that the edge shrank as more teams integrated, just as the model predicts. Jonathan Lanning (2010) put a price on the delay: the median team gave up about $2.2 million in 1950 dollars, the figure from the opening of this chapter. Prejudice was a real cost, and many owners paid it anyway.
Banking. For decades, state rules shielded banks from competition. Sandra Black and Philip Strahan (2001) studied what happened as states removed those rules from the mid-1970s on. Men's wages in banking fell about 12%, women's about 3%, and women's share of managerial jobs rose. The protected profits had been shared mostly with men; competition took that away.
Becker's logic also explains where discrimination survives. It lasts where competition is weak, as in protected banking or a one-employer town. It lasts when customers or coworkers are prejudiced, because then discrimination can pay instead of cost: Hanssen found that each Black player reduced attendance more in the American League than in the National League, and the American League integrated more slowly. And it lasts when the law requires it.
Becker's argument works one firm at a time: the firm that discriminates pays, and the rival that doesn't, profits. The logic runs backward when the discrimination comes from everyone around the firm. If a town's customers won't eat beside Black diners, if white workers walk out when a Black coworker is promoted, or if the law requires separation, then the open firm is the one that pays. Markets wear down the prejudice of employers. On their own, they cannot overturn what a whole community demands. The next two cases show both halves of that.
Jennifer Roback (1986) studied the laws that segregated streetcars in Southern cities around 1900. The streetcar companies didn't start segregation, and some actively resisted it: separate cars cost money and annoyed paying customers. Segregation was imposed by law over the objections of the businesses that had to carry it out.
Markets alone did not end the exclusion, though. James Heckman and Brook Payner (1989) studied South Carolina, where Black workers had been shut out of most manufacturing jobs for generations. Their economic status jumped sharply in the mid-1960s. Rising education, shifts in labor supply, and tight labor markets couldn't explain the timing; federal antidiscrimination programs, including the Civil Rights Act of 1964, made a significant contribution. Competition punishes prejudice, but when custom, law, and fear of how customers or coworkers will react hold a barrier in place, sometimes the law has to break it.
When rivals turn away good workers for reasons that have nothing to do with the work, those workers are easier to hire and just as good. Branch Rickey saw it. Judge the work, not the category. It is the right thing to do, and it is good business.
Quick check In a highly competitive industry, a few employers refuse to hire women. Over time, what does Becker's model predict? ▸
Quick check Why might discrimination persist in a competitive market if customers are prejudiced? ▸
Retrieval practice Explain Becker's argument that competition makes taste-based discrimination costly, and name two situations in which discrimination can survive anyway. ▸
A firm that refuses equally productive workers pays more for the same output, so it earns less than rivals who hire them; competition rewards the open firms and bids the excluded group's wage up. Discrimination survives when competition is weak, when customers or coworkers are prejudiced, or when the law requires it.
Statistical Discrimination and the Evidence
Becker's argument has a gap, and economists found it. Not all discrimination comes from prejudice. Hiring is a guess: an employer has a résumé and a short interview, and has to predict how a stranger will perform for years. When information about the individual is costly, some employers fall back on what they believe about the group the person belongs to. That is statistical discrimination. It can happen with no prejudice at all, and that is what makes it hard: if the guess is cheaper than finding out, it can be profitable, so competition doesn't necessarily drive it out. It is still deeply unfair to every individual who doesn't match the average.
A striking case came from a well-meant reform. Many cities and states passed "ban the box" laws, which stop employers from asking about criminal records on job applications. The goal was to give people with records a fair first look. But employers who could no longer ask seemed to guess instead, and some guessed by race.
The lesson is not that the reformers were cruel. It is that statistical discrimination responds to information. The fix that follows from the economics is more information about individuals, not less: skills tests, work trials, certificates of rehabilitation, apprenticeships, and records of what a person has actually done.
How much discrimination is left? The best evidence comes from audit studies, which send employers matched applications that differ only in the applicant's apparent race or sex.
Bertrand and Mullainathan (2004). About 5,000 résumés to job ads in Boston and Chicago, with names that sounded white or Black.
Found: White-sounding names got about 50% more callbacks.
Kline, Rose, and Walters (2022). More than 83,000 applications to 108 of the largest U.S. employers.
Found: Distinctively Black names were contacted 2.1 percentage points less often; the most discriminatory fifth of firms accounted for nearly half of the gap.
Both findings matter. Discrimination in hiring is real and measurable. But the large 2022 study found it concentrated: most big employers showed little, and a minority showed a lot. That is roughly what Becker would expect in markets where most firms compete hard for workers, and it points to where the problem lives. The same study found no significant gap, on average, between men and women in who got contacted, which fits Claudia Goldin's finding from Concept 2: most of today's gender gap does not open at hiring.
Quick check An employer can't ask about criminal records, so it avoids hiring young men from a group it believes has high conviction rates. Which kind of discrimination is this, and what policy would reduce it? ▸
Retrieval practice Contrast taste-based and statistical discrimination, and explain why competition erodes one more reliably than the other. ▸
Taste-based discrimination comes from prejudice and costs the employer profit, so competition punishes it. Statistical discrimination uses group averages to save on costly information; it can be profitable, so competition doesn't reliably remove it. Better information about individuals is the more effective remedy.
The moves you can now make
Four questions at exam level: a minimum wage, why wages differ, monopsony, and discrimination under competition. Try each on paper first, then reveal.
Type A · minimum wage
In a perfectly competitive labor market for fast-food workers, the equilibrium wage is $14 an hour and 5,000 people are employed. The city sets a minimum wage of $16. At $16, employers want to hire 4,200 workers and 5,600 people want jobs. Using a correctly labeled graph, show the effect. How many are employed, and how much unemployment does the policy create? What would happen if the minimum were set at $13 instead?
Show model answer ▸
Wage on the vertical axis, quantity of labor on the horizontal, with the floor drawn as a horizontal line at $16, above the $14 equilibrium. Employment is the quantity demanded at the floor: 4,200, down 800 from 5,000. Unemployment is quantity supplied minus quantity demanded: 5,600 − 4,200 = 1,400. The 4,200 who keep jobs earn $2 an hour more. A $13 minimum would be non-binding: it is below the $14 market wage, so nothing changes.
Type B · why wages differ
Identify the main reason for each wage difference: (1) Underwater welders earn more than welders with the same training who work on land. (2) A worker with a degree earns more than one without, even when the job uses nothing taught in college. (3) A software engineer earns more after learning a new programming language. (4) The top concert pianists earn many times what very good pianists earn.
Show model answer ▸
(1) Compensating differential: the work is dangerous, so it pays more. (2) Signaling: the degree shows qualities the employer can't see directly. (3) Human capital: the new skill raises her marginal product. (4) Scarcity and superstars: a rare talent sells to a huge market, so small differences in skill mean large differences in pay.
Type C · monopsony
A town's only large employer faces an upward-sloping labor supply curve. Its MRC and MRP curves cross at 6 workers, where both equal $32. At 6 workers, the supply curve shows a wage of $20. The supply curve and MRP cross at 9 workers and $26. How many workers does the monopsonist hire, and at what wage? Compare with a competitive market, and explain why MRC lies above supply.
Show model answer ▸
The monopsonist hires 6 workers (where MRC = MRP) and pays $20, the wage read from the supply curve at 6 workers. A competitive market would employ 9 workers at $26, where supply meets MRP. So monopsony means fewer workers and a lower wage. MRC lies above supply because hiring one more worker requires raising the wage for all workers, so the extra cost is more than the new worker's own wage.
Type D · discrimination under competition
For decades, state laws protected banks from competition. Economists found that when the laws were removed, men's wages in banking fell much more than women's, and women's share of managerial jobs rose. Explain these results using Becker's model of discrimination.
Show model answer ▸
Protection from competition let banks earn extra profit, and some of it went to indulging a preference for men: paying them more and promoting them first. Discrimination was affordable because no rival could undercut a bank that wasted talent. Deregulation brought competition. Banks that kept paying for the preference now lost ground to banks that hired and promoted the best people regardless of sex, so the premium paid to men shrank and women moved into management. Becker's prediction: competition makes taste-based discrimination costly, so it shrinks.
Put the moves together
A hospital is the only employer of nurses in a rural town. To hire more nurses it must raise the hourly wage for all of them. The table shows the wage needed to attract each number of nurses (the labor supply) and each nurse's marginal revenue product.
| Nurses | Wage needed | MRP |
|---|---|---|
| 1 | $24 | $64 |
| 2 | $28 | $60 |
| 3 | $32 | $56 |
| 4 | $36 | $52 |
| 5 | $40 | $48 |
| 6 | $44 | $44 |
- Calculate the total labor cost of hiring 3 nurses, and the marginal resource cost of the third nurse. (2 pts)
- How many nurses will the profit-maximizing hospital hire, and what wage will it pay? Explain. (2 pts)
- If the market for nurses were perfectly competitive, how many nurses would be hired, and at what wage? (2 pts)
- Draw a correctly labeled monopsony graph showing labor supply, MRC, and MRP, with the hospital's employment and wage marked. (2 pts)
- A second hospital opens in town and competes for nurses. Explain what happens to the wage and the number of nurses employed. (1 pt)
- Suppose the original hospital refused to hire qualified nurses from one group. Using Becker's model, explain what this would cost the hospital. (1 pt)
Reveal a full-credit response ▸
(a) Total labor cost of 3 nurses = 3 × $32 = $96. For 2 nurses it is 2 × $28 = $56, so the MRC of the third nurse is $96 − $56 = $40.
(b) MRC for nurses 1–6 is $24, $32, $40, $48, $56, $64. The hospital hires while MRP is at least MRC: the fourth nurse adds $52 and costs $48, but the fifth adds $48 and costs $56. It hires 4 nurses and pays the wage on the supply schedule for 4, $36.
(c) Competitive employers hire until the wage equals MRP: at 6 nurses both are $44. So 6 nurses at $44.
(d) Wage on the vertical axis, nurses on the horizontal. Upward-sloping supply, an MRC curve above and steeper than supply, and a downward-sloping MRP. Employment at 4 where MRC = MRP; the wage of $36 read down from that quantity to the supply curve.
(e) The hospitals now compete for nurses, so each must match the other's wage offers. The market moves toward the competitive outcome: the wage rises and the number of nurses employed rises.
(f) Refusing qualified nurses shrinks the pool the hospital can draw from, so it must pay more to fill each position, or hire fewer nurses, for the same MRP. That is lost profit: Becker's point that discrimination is a cost the employer pays.
Reveal the scoring rubric ▸
- 1 pt (a) Total labor cost of 3 nurses = $96.
- 1 pt (a) MRC of the third nurse = $40.
- 1 pt (b) Hires 4 nurses, where MRP ≥ MRC for the last one hired.
- 1 pt (b) Pays $36, the wage from the supply schedule.
- 1 pt (c) 6 nurses.
- 1 pt (c) Wage of $44.
- 1 pt (d) Correctly labeled graph with MRC above supply and a downward-sloping MRP.
- 1 pt (d) Employment where MRC = MRP, and the wage read from the supply curve below that point.
- 1 pt (e) Wage and employment both rise, because competition for nurses moves the market toward the competitive outcome.
- 1 pt (f) Discrimination raises the hospital's cost or reduces its output for the same MRP, lowering profit.
Ten independent points. A wrong MRC in (a) doesn't cost the (b) points if the hiring decision follows correctly from it.
Reveal what loses points ▸
- Conceptual Using the wage as the cost of the next nurse. For a monopsonist, MRC is above the wage because everyone's wage rises.
- Precision Paying the wage where MRC = MRP ($52 here). The hospital pays only the wage on the supply schedule.
- Exam craft Drawing MRC below or parallel to supply. MRC starts at the same point and rises more steeply.
Competition is a powerful ally of fairness: a firm that turns away good workers hands them to its rivals. But markets wear discrimination down only where competition is real, information is good, and the law lets them.
we would make employers compete hard for every worker: more firms bidding for the same people, better information about what each person can actually do, and no laws or licenses that keep qualified people out.
- Wages differ with human capital, signaling, compensating differentials, and scarcity.
- Compared with competition, a monopsonist hires fewer workers and pays a lower wage.
- A minimum wage below the market wage does nothing; the effect of a binding one grows with how far it sits above local wages.
- Audit studies find real hiring discrimination, concentrated in a minority of firms.
- Where competition increased, as in baseball and banking, discrimination gaps shrank.
- How many lost jobs or hours are worth accepting in exchange for higher pay for the workers who keep theirs?
- How far should the law go in telling employers whom to hire?
- When judging people by group averages is profitable, should it be banned, and how could a ban avoid backfiring?
- Should employers be expected to make flexible hours cheaper, or is that a choice for workers and firms to bargain over?
Make your ability easy to see. A portfolio, a certificate, or a work sample replaces a stranger's guess about your group with evidence about you.
Hire the talent others overlook. Judge the work, not the category, and you will find good people your competitors walked past.
