Earnings and Discrimination

In the United States today, the typical physician earns about $200,000 a year, the typical police officer about $50,000, and the typical farmworker about $20,000. These examples illustrate the large differences in eamingsthat are so common in our economy. The differences explain why some people live in mansions, ride in limousines, and vacation on the French Riviera, while other people live in small apartments, ride a bus, and vacation in their own backyards.

Why do earnings vary so much from person to person? Chapter 18, which developed the basic neoclassical theory of the labor market, offers an answer to this question. There we saw that wag~s are governed by labor supply and labor demand. Labor demand, in turn, reflects the marginal productivity of labor. In equilibrium, each worker is paid the value of his or her marginal contribution to the economy’s production of goods and services.

This theory of the labor market, though widely accepted by economists, is only the beginning of the story., To understand the ‘wide variation in earnings that we observe, we must go beyond this general framework and examine more precisely what determines the supply and demand for different types of labor. That is our goal in this chapter.

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