Differences In People: Labor Quality

We have just seen that some wage differentials serve to compensate for the different degrees ‘of attractiveness of different jobs. But look around you. Garbage collectors make much less than lawyers, yet surely the legal life has higher prestige and much more pleasant working conditions. We see countless examples of high-paying jobs that are more pleasant rather than less pleasant than low paying work. We must look to factors beyond compensating differentials to explain the reason for. most wage differences. ‘ One key to wage disparities lies in the tremendous qualitative differences among people, differences traceable to variations in innate mental and physical abilities. upbringing. education and training, and experience. A biologist might classify all of us as members of the species Homo sapiens, but a personnel officer would insist that people differ enormously in their abilities to contribute to a firm’s output.

While many of the differences in labor quality are determined by non economic factors, the decision to accumulate human capital can be evaluated economically. The term “human capital” refers to the stock of useful and valuable skills and knowledge accumulated by people in the ,process of their education and training. Doctors, lawyers, and engineers invest many years in their formal education and on-the-job training. They spend large sums on tuition and wages forgone. investing $100,000 to $200.000 college and graduate training, and often work ng hours. Part of the high salaries of these professionals should be viewed as a return on their investment in human capital-a return on the education at makes these highly trained workers a very I kind of labor.

Economic studies’ of incomes and education ow that human capital is a good investment on avt Tage. Figure 13.-5 shows the income profiles for different groups as a function of their education an d experience. Groups with higher education start out with higher incomes and enjoy more rapid growth in incomes than do less-educated groups. Figure 13-6 on p. 252 shows the ratio of the hourly earnings of college graduates to those of high school graduates. Relative earnings rose sharply after 1980 .as the “price of skill” rose. Studies by labor economists have shown that individuals who have high quantitative abilities or computer skills have an economic advantage in today’s labor market.

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