This document provides an overview of chapter 8 from an economics textbook on the wage structure. It discusses several key topics: 1. Sources of wage differentials arising from differences in jobs, employers, and workers. This includes compensating differentials for undesirable job attributes and skill differentials. 2. Efficiency wage theories where firms pay above-market wages to reduce shirking and turnover. This can lead to involuntary unemployment as the market clears at a wage above the equilibrium. 3. The hedonic theory of wages uses indifference curves and isoprofit curves to show how workers and firms optimize when matching based on wages and job attributes like safety. Workers trade off higher wages for less desirable job conditions.

1. Lecture 6
Economics 2F

2. Chapter 8
The Wage Structure
Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

3. Study unit 5: The Wage Structure
1. Identify sources of wage differentials arising from differences in job
or employer characteristics as well as those that arise from
worker differences.
2. Discuss the reasons for wage differentials in the South African
labour market, and possible measures to reduce these
differentials.
3. Distinguish between "equilibrium" wage differentials: A wage
differential that does not cause workers to shift their labour
supplies to alternative employments”
4. and "transitional" wage differentials: short-run wage
differences that arise from imperfect and costly information as
labour markets move toward final equilibrium.
5. Describe how efficiency wage payments can cause wage
differences.
6. Using the hedonic theory of wages, derive the expected
observed relationship between wages and nonwage job attributes

4. Perfect Competition: Homogenous workers & jobs - all
workers & all jobs have identical characteristics. Information is perfect &
mobility is costless, Thus: all workers receive same real wage.
• Assume: wage is
• R10 in submarket (A) is
R5 in submarket (B)
• jobs & workers are
homogenous and
information & mobility
is costless
• Workers will leave (B)
and enter the higher
paying (A).
• Labour supply will
decrease in (B) and
increase in (A)
• Move from Sa to S’a and
Sb to S’b) .
• The equilibrium wage rate
decrease in submarket (A) and
rise in the other submarkets until
the wage rate is the same in all
submarkets (R7-50).

5. Wage differences – wage gaps
Skills
Undesirable job
Shortage of labour
Fringe benefits
Risky job
Job status
Job location
Job security
Regularity of earnings
Prospect of wage
advancement
Personal control over the
workplace
Nonwage job benefits
Encourage workers to be
efficient
Reduce turnover rates
Union wage advantage
Discrimination
Size of the firm
Non-competing groups
Present/ future oriented
Labour market imperfection
Information and job search is costly
Non-wage amenities
Lengthy Adjustment Period
Geographic immobility
Institutional immobility
Sociological immobility

6. 2. The Wage Structure: Observed Differences
8-6
• Observed wage differentials of the economy, broken down by:
• industry,
• occupation,
• geographical location (provincial or urban/rural), or
• job differences (compensating wage differentials)
• skills differences (skill wage differentials)
• Shirking model and Turnover model – (efficiency wage
payments)
• Other job or employer differences
• Wage Differentials: Heterogenous (different) workers
• Wage Differentials: Labour market imperfections

7. 3. Wage Differentials: Heterogenous (different) jobs
– Compensating wage differentials
• Different wages to compensate for job differences
• Compensating wage differentials:
• extra pay provided to a worker for some undesirable job
characteristic not existing in alternative employment. Also
called wage premium or equalising differences.
• caused by?
• The wage differential is caused by a decreased labour
supply for job with undesirable job characteristic and an
increased labour supply for alternative employment.
8-7

8. Compensating Differentials (sources)
• Risk of job injury or death
• Riskier jobs pay higher wages. In America app 5%
• Fringe benefits
• Jobs with greater fringe benefits pay lower wages (sick leave,
paid vacation, medical insurance)
• Without fringe benefits - Compensating premium to equalise
gross hourly compensation
• Job status
• Jobs with greater status/prestige pay lower wages.
• Status = defined culturally – can change
• Job location
• Cities with greater amenities (facilities) pay lower wages.
• Cities with greater cost of living pay higher
nominal wages.
8-8

9. Compensating Differentials
• Job security (regularity of earnings)
• Full-time jobs, construction, consultation work, commissioned
sales – variability of employment and/or earnings
• Jobs with greater job security pay lower wages.
• With less job security – higher wages – risk for longer spells of
unemployment
• Prospect of wage advancement (investment in human
capital)
• Jobs with greater wage advancement have lower starting
wages – banking profession
• If prospect of wage advancement is flat (carpenter), higher
starting wages
• Extent of control over the work place
• Jobs with less personal control over the workplace and less
flexible work hours pay higher wages.
8-9

10. 4. Skill differentials - differing skill requirements
• Jobs that require more education and training:
• pay a higher wage rate than those that do not.
• Example: Surgeons earn more than Nurses
• If a person has to invest in human capital to be employed (more
costly) – expect higher earnings – otherwise no incentive to study
• Earning difference should be sufficient to produce an internal rate
of return which is at least equal to the interest rate - (r) = i
• The wage difference between skilled and unskilled workers is
called the skill differential.
• Skill differentials can increase, decrease, or reverse wage
differences caused by compensating differentials.
8-10

11. Assume:
Case 1: Job A: high risk of injury – pay R3ph more AND
skills necessary greater than for Job B – pay another compensating
wage for higher skills - R4ph more
Wage differential will now exceed the R3ph paid for high risk of injury
Case 2: Job A: Moderately risky, but requires less skills - wage
differential is now less than R3ph
Job B: Safe but requires great investment in skills
Wage differential for risk is less than R3ph but
Wage differential for greater skills is more than R3ph
Thus: the safe job can pay more than the dangerous job because
of skills premium.
If pleasant working conditions is a “normal good” – workers get better
working conditions if wage is higher
Highly skilled workers can “buy” better working conditions as part of
their compensation package – give up some wage for more
nonwage job benefits/ amenities

12. 5. Wage differences based on efficiency wage
payments
• Efficiency wage – higher wage to workers to encourage
them to be efficient
• Shirking model – workers not performing well
• Firms will pay above-market wages where it is costly to
monitor employee performance
• or
• When the employer’s cost of poor performance is high.
• Turnover model
• Firms will pay above-market wages when hiring and
training costs are high.
• Wage premium increases the value of the job to the worker,
thus reducing the turnover rate
8-12

13. Efficiency wage payments
Pay-for-performance plans - effective where individual output can be
measured.
But in many jobs measuring or assessing individual output is difficult or
impossible.
One solution:
Direct observation of the worker’s actions on the job.
Reduce shirking by direct observation of the worker’s actions on the job -
monitoring the efforts of workers (e.g. hiring supervisors).
Most workers will not shirk when being observed - fear loss of their jobs - those
who do will be identified and replaced.
Thus: many jobs in the economy are supervisory.
Monitoring workers, however is costly
How might firms deal with shirking problem when supervision is costly and
individual output is difficult to measure?
One such approach may be to pay workers a wage that is above the market-
clearing level.

14. Wage–Productivity Dependence
Chapter 6 - assumed homogeneous labour - change in wage rates did
not alter the marginal product of labour - altered the quantity of
labour demanded (move along the demand curve)
But, under some conditions a wage rise may positively affect labour
efficiency, causing a rightward shift of the labour demand curve -
efficiency wage theories.
An efficiency wage: minimizes an employer's wage cost per effective
unit of labour service employed.
In competitive labour markets and homogeneous labour inputs, the
market-clearing wage is the wage that minimizes a firm's wage cost
per effective unit of labour service employed.
All workers are assumed to be equally and fully effective in the
production process.
Under assumptions of heterogeneous labour and wage–productivity
dependence, a firm may find that it can lower its wage cost per
effective unit of labour service by paying a higher wage rate.

15. Wage–Productivity Dependence
Suppose:
Workers who are fully effective at some task can each produce 10
units of a particular output ph.
The market wage rate is R5 ph. For some reasons, workers each
produce only 5 units ph instead of 10 units at the R5 wage.
The firm needs two hours of labour services to obtain 10 units of output
(= 2 × 5), and each hour costs R5 in wages.
If firm discovers that it can obtain fully effective units of labour—
those (that produce 10 units ph)—by paying R8 an hour?
Thus: hourly wage cost per effective unit of labour declines by R2 (=
R10 − R8) as the wage rate rises by R3 (= R8 − R5).
The higher wage more than proportionally:
• Induces greater employee work effort,
• improves the workers’ capabilities, or
• increases the proportion of highly skilled workers in a particular
workforce.

16. Shirking Model of Efficiency Wages:
The shirking model of efficiency wages:
enterprises pay more than the market-clearing wage to reduce
employee shirking.
This higher pay increases the relative value of the job as viewed by
each worker.
It also raises the cost of being terminated for shirking, should it be
detected.
The higher opportunity cost (price) of shirking reduces the amount of
shirking occurring.
Worker productivity improves more than proportionally to the higher
wage, the labour demand curve is located farther rightward, and
wage costs per effective unit of labour decline.

17. Labour turnover model
Employers may increase wages to reduce costly labour turnover (rate
at which workers quit their jobs, necessitating their replacement by
new workers).
Why important:
• employers pay for providing firm-specific training to new workers.
• workers normally “learn by doing,” new workers are not initially as
proficient as the people they replace.
An above-market-clearing wage raises the workers’ costs of quitting
their jobs and thus lowers the likelihood that they will quit.
Lower labour turnover, in turn, increases worker productivity on the
average because it increases the proportion of experienced
workers relative to those being trained and still “learning by
doing.”
The higher wage rate shifts the labour demand curve rightward.

18. Efficiency wage implication: Nonclearing Labour
Markets Permanent unemployment may exist
Initial equilibrium wage rate and level of
employment are W1
and Q1
.
Firm reduce its wage cost per effective
unit of labour by increasing the wage to
W2
(from a to b).
This results from the rightward shift of the
labour demand curve from DL1
to DL
(from
an increase in the marginal product of
labour). -
Firm continues to employ Q1
workers (at b)
as before
But this equilibrium wage is not the
market-clearing wage.
At W2 the firm employs Q1 workers, but
Q2 workers seek employment (at c).
Assuming that workers do not find jobs
elsewhere, permanent unemployment of
bc occurs in this particular labour market.

19. 6. Differences based on Other Job or
Employer Heterogeneities (differences)
• Union status
• On average, unions generate a substantial wage advantage
for their members – thus union workers earn more than non-
union workers.
• Why?
• Part of the difference may be due to structured work
setting, inflexible hours, higher productivity
• Most are due to economic rent to union workers (ability of
unions to exert market power).
• Discrimination
• Discrimination against women and minorities exists in
some markets and creates wage differentials.
8-19

20. 6. Other Job or Employer heterogeneities
(differences)
• Absolute and relative firm size
• Large firms (major market shares) pay higher wages
than small firms.
• Large firms are more likely to be unionised.
• Workers at large firms may be more productive due to:
• Training, better quality workers (needs less
supervision), greater capital per worker
• Higher wages may be due to compensating wages
– less pleasant environment, located in major
metropolitan areas, high living costs, commuting and
parking expenses is high.
• Large firms makes significant economic profits – give
workers more “bargaining power”
8-20

21. 7. Wage Differentials: Heterogenous (different)
workers
• Non-Competing Groups
• Individuals differ in the type, amount, and quality of
their human capital.
• The result: the labour force consists of non-
competing groups of workers that are not easily
substitutable for each other (nuclear physicists
and professional athletes and football players).
• In the short run: these differences in human
capital generate wage differentials.
• In the long run, the wage differentials cause
individuals to move to higher paying jobs to
some extent.
8-21

22. 7. Wage Differentials: Heterogenous
(different) workers
• Differing time preferences
• Persons who are present-oriented (i.e., have a high discount
rate) are not willing to sacrifice present consumption without a
large increase in future income.
• Persons who are future-oriented (i.e., have a low discount rate)
are willing to sacrifice present consumption for a small increase
in future income - acquire more human capital and thus create
wage differentials.
8-22

23. 7. Wage Differentials: Heterogenous
(different) Workers
• Differences in tastes for non-wage aspects of jobs
• People have different preferences for job security, location,
and risk.
• Some people find vacations boring and would gladly forgo paid
absences for higher hourly pay
8-23

24. 8. The Hedonic Theory of Wages:
Indifference Map
• The “hedonic”
indifference map is
composed of a number of
indifference curves.
• Each individual curve
shows the various
combinations of wage
rates and a particular
non-wage amenity (for
example job safety) that
yield a specific level of
total utility.
• Each curve to the
northeast reflects a
higher level of total utility.
Non-wage amenity (job safety)
Wage Rate
I1
I2
I3
• A steep curve implies that the person is risk averse—
it takes a large increase in the wage rate to
compensate for a small reduction in job safety.
8-24
Hedonism: people pursue utility
and avoid disutility

25. 8. Hedonic Theory of Wages: Isoprofit Curve
Nonwage amenity (job safety)
Wage Rate
P
• The employer’s normal profit,
isoprofit curve shows the
various combinations of
wage rates and a particular
nonwage amenity (for
example job safety) that
yield a given level of total
profit.
• The isoprofit curve gets
steeper with higher levels
of job safety since it gets
more and more expensive to
increase job safety.
• Competition among firms will
result in only normal profits
(zero economic profit) in the
long run.
• Firms will have to make their
wage rate-job amenity
decisions along a curve such
as P.
• Firms differ in their ability to increase job safety and
thus have different isoprofit curves.
8-25
Costly to increase safety at
the workplace:
Safer machinery, protective
work gear,
slow pace of work

26. 8. Hedonic Theory of Wages: Matching
workers with jobs
• Slope of isoprofit curve PB is
steeper than curve,PA thus
the MC of job safety is
more expensive at firm B
than at firm A.
• Indifference curve IA is
steeper than curve IB which
implies that person A is
more risk averse than
person B.
• Workers maximize utility by
being tangent to the highest
possible isoprofit curve.
• The risk averse worker will
work for the firm able to
raise safety at low MC.
• The worker will get wage WA
and safety SA.
• The risk loving worker will work for the firm who
can only raise safety at high MC. The worker
will get wage WB and safety SB.
A
SA
WA
IB
IA
PA
Nonwage amenity (job safety)
Wage Rate
PB
B
SB
WB
8-26
Steeper
A = more risk
averse
Flatter
B = risk taker
Job safety more expensive
Job safety less expensive

27. (a) optimal job match between worker A (place high value on job safety)
and firm A (can produce job safety at relatively low marginal cost).
(b) utility-maximizing and profit-maximizing wage rate–nonwage amenity
combination (point b) for a worker who is less averse to risk and a
firm that has high marginal costs of making the workplace safer.
(c) optimal wage–job safety combinations shown in (a) and (b).
Line WS in (c) indicates general relationship between wage rates and
job safety in a labour market characterized by many—not just two—
heterogeneous workers and jobs. Higher wage rates are associated
with lower levels of nonwage amenities, other things being the same.

28. 8. The Hedonic Theory of Wages: Labour
Market Implications
• Workers with fewer non-wage amenities will get higher wages.
• Laws with minimum safety standards may reduce utility of
some workers.
• Risk loving workers would prefer higher wages to greater
safety.
• Part of the male-female wage differential may reflect differences
in preferences for non-wage amenities.
• Women may prefer shorter commuting distances and safer
jobs.
• Workers with strong preferences for fringe benefits will match up
with firms that can provide fringe benefits at low cost.
• Cafeteria plans which allow workers to choose from a variety
of fringe benefits allow workers to get higher utility since they
are not forced to accept a fixed package of fringe benefits.
8-28

29. 9. Wage Differentials: Labour Market
Imperfections
• Wage Rate Distributions
• Information and job search is
costly – no single equilibrium
wage for a specific
occupation.
• A range of possible wages will
exist for an occupation.
• 20% workers earn between
R8.80 and R8.99 ph.
• 5% earn between R8.00 and
R8.19
• 5% earn between R9.60 and
R9.79.
• These wage differentials will
not cause job switching
since the marginal cost of
obtaining the information
exceeds expected marginal
benefits of the higher wage
MC>MR.
5%
8%
12%
15%
20%
15%
12%
8%
5%
0%
5%
10%
15%
20%
25%
Wage Rate
8.0 8.2 8.4 8.6 8.8 9.0 9.2 9.4 9.6
8-29

30. 9. Wage Differentials: Labour Market
Imperfections
• Lengthy Adjustment Period –
transitional and equilibrium wage
differences
• An increase in demand for labour
initially may cause a substantial
wage increase to W0 in occupations
with lengthy training periods.
• But the supply response to higher
wage may create surplus of labour to
the occupation in the next period,
driving the wage rate lower to W1.
• For a time the wage rate may
oscillate above and below the
long-run equilibrium wage rate We
before equilibrium in the market is
finally restored.
• During the transition periods,
wage differentials between this
occupation and others paying We
will be observed.
Units of Time
Wage Rate
W0
W1
W2
W3
We
We
8-30

31. 9. Wage Differentials: Labour Market
Imperfections
• Labour immobilities
• Labour immobilities are impediments to the movement of
labour and can cause wage differentials.
• 1. Geographic immobilties
• Costs of moving (direct and indirect) can deter migration
and permit wage differentials to exist across geographic areas.
8-31

32. 9. Wage Differentials: Labour Market
Imperfections: Immobilities
• 2. Institutional immobilties
• Restrictions on mobility imposed by the
government or unions can deter mobility.
• Occupational licensing, apprenticeships
• 3. Sociological immobilties
• Race and gender discrimination will cause racial
and gender wage differentials to exist.
• Females appear to be crowded into certain
occupations
8-32

33. Chapter 16
The Distribution of Earnings
National level
Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

34. Distribution of Earnings – National
level - not specific wages
Thus: macro-economic level
Two graphical presentations of the degree of inequality in the
distribution of earnings:
Frequency distribution – histogram
Lorenz curve
Frequency distribution – histogram
Characteristics of distribution of annual earnings:
1)are highly unequal and skewed to the right
2)Much bunching around the mode (income category occurring with the
greatest frequency)
3)Extended rightward tail
4)A mean (average) that exceeds the median (half above, half below)

35. Describing the Distribution of Earnings
Annual Earnings Distribution, USA 2010
16-35

36. Income distribution South Africa, 2010
South African Survey: Employment and Incomes 2009-2010
(SAIRR, 2010)

37. Households by income category

39. Distribution of Annual Earnings, USA,
2010 – Quintiles or deciles
• Quintiles or
deciles (when
distribution of the
variable is divided
into five/ten
groups having
equal
frequencies.
• The distribution of
personal earnings
among full-time
workers is highly
unequal as the
highest 20% of
earners received
44.8% of all
earnings.
16-39

40. Distribution of Annual Earnings, SA, 2009
Income distribution 2009
(quintiles)
Lowest 80%
earned 31.8% of the income
Top 20% earned 68.2% of the
income
Lowest 20% earned 2.7% of
the income
http://www.indexmundi.com

41. Income
distribution
deciles
Lowest 10%
earned 1.17%
Highest 10%
earned 51.69%
of the income
Distribution of Annual Earnings, SA

42. Lorenz Curve
• The Lorenz curve provides a
summary of the earnings
distribution.
• The straight red line
represents perfect equality
in the earnings distribution.
Twenty percent of all
earners get 20 percent of all
earnings, 40 percent of the
workers would get 40
percent, etc.
• The curved blue line
illustrates a Lorenz curve.
The curve shows that lower
income workers do not
receive a proportionate
share of all earnings.
• The greater the area (A)
between the line of perfect
equality and the Lorenz
curve, the more unequal the
distribution of earnings.
%ofFull-timeEarnings
% of Full-time Workers
Perfect Equality
0
100
100
Lorenz Curve
16-42
50
15
A
B

43. Gini Coefficient
• The Gini coefficient provides a
mathematical measure to quantify
the Lorenz Curve.
Gini
Coefficien
t
=
area between Lorenz curve and diagonal
total area below diagonal
= Area A / Areas A+B
The Gini coefficient ranges between 0
(perfect equality) and 1 (perfect
inequality).
16-43

44. Income inequality - Gini coefficient
Year
2006
Total
0.66
2007 0.66
2008 0.65
2009 0.64
2010 0.64
2011 0.63
2012 0.63
2013 0.62
1996–2013 3.33%
Year Total
1996 0.6
1997 0.62
1998 0.63
1999 0.64
2000 0.65
2001 0.66
2002 0.66
2003 0.67
2004 0.67
2005 0.66
Source: IHS Global Insight Southern Africa, Regional eXplorer
ver 752, 2014

45. Cautions
• Full-time versus part-time workers
• The previous data only includes full-time workers.
• If part-time workers were included?
• income variability would increase.
• Fringe benefits
• The previous data did not include fringe benefits.
• If fringe benefits were included?
• Income inequality will increase (those with high incomes
also have high fringe benefits).
16-45

46. Cautions
• Individual versus family income
• The previous data is based on individual income.
• The mean and median of the family income distribution is higher.
• The family income distribution is more equal since the wives of
high-income men are less likely to work due to the income effect.
• Static portrayal
• This income distribution don’t give information about changes in
the distribution.
16-46

47. Cautions
• Other income sources
• High wage income persons tend to have higher rental,
interest, and dividend income.
• Including these sources increases inequality.
• Low wage income persons are more likely to get income
transfers such as social grants.
• Including these sources decreases inequality.
• If all other income sources are included, then the income
distribution becomes more equal.
• The income transfer effect is stronger.
16-47

48. Lorenz Curve: South Africa
The South African Gini coefficient was 0,70 in 2010, when income
from work, pensions from previous employment, and annuities from
own investments were included.
When adding social grants income (i.e. old age pensions, disability
grants, family and other allowances, workmen’s compensation funds
remittances and other income from individuals) the Gini coefficient
declined to 0,65.
By further including free water, free sanitation, free electricity and
other free services, the Gini coefficient declined to 0,61.
And by adjusting incomes for direct personal income tax, the Gini
coefficient declined to 0,59.
No adjustment were made for housing subsidies, although it could be
assumed that the inclusion of housing subsidies would have reduced
the Gini coefficient even further
Bosch, A., Rossouw, J., Claassens , T. & du Plessis, B. 2010. A Second look at
measuring inequality in South Africa: A modified Gini coefficient, Working Paper No 58,
School of Development Studies.

49. Income components by decile, SA, 2008
Leibbrandt, M. et al. (2010), Trends in South African Income Distribution and Poverty
since the Fall of Apartheid, OECD Social, Employment and Migration
Working Papers, No. 101, OECD Publishing.
http://dx.doi.org/10.1787/5kmms0t7p1ms-en
Decile = one of the values of a variable that divides the distribution of the
variable into ten groups having equal frequencies.
Leibbrandt, M. et al. (2010:27)

50. 2. Explaining the Distribution of Earnings:
Human Capital Theory
• Formal education
• Higher quality and quantity of formal education leads to greater
earnings.
• Differences in ability, discrimination, cost of funds cause
differences in the amounts of education people acquire.
• This leads to differences in earnings.
• On-the-job training
• More on-the-job training increases earnings.
• On-the-job training helps explain why older persons have higher
earnings.
• Persons with more formal education get on-the-job training and
thus expand their earnings differentials with less-educated
workers.
• Workers with on-the-job training tend to work more hours per
year and thus the variance in annual earnings.
16-50

51. Modified Human Capital Theory
• Ability
• Direct effect
• Persons with greater ability will have greater earnings due
to their greater productivity. Self-selection – people with
more intelligence are more likely to attend college than
those with less intelligence
• Complementary effect
• If elements of ability are complementary (e.g., IQ and
motivation), then they will have a multiplicative rather than
an additive effect on earnings.
• Human capital effect
• Persons with more ability will get more education
and thus increase earnings inequality.

52. Modified Human Capital Theory
• Family background
• Direct effect
• A child born into a family with a family-owned business is
likely to be employed in the family business and have higher
earnings later in life.
• Families with “good connections” may be able to help
their children get high-paying jobs with friends and
associates.
• Better access to information regarding job openings
• Human capital effect
• High income families can more readily provide formal
education for their children. (more pre-school education,
better schools, stress importance of higher education as
route towards a professional career
16-52

53. Modified Human Capital Theory
• Discrimination
• Discrimination increases earnings inequality in several
ways:
• Lowers the earnings of women and minorities
• Occupational segregation raises the earnings of males
and whites as well as lowering the earnings of women and
minorities.
• Poorer black children tend to attend worse schools and
are less likely to go to college.
16-53

54. Modified Human Capital Theory
• Chance and risk taking
• Luck and risk-taking play a role in the unequal distribution of
earnings.
• A few high paying positions such as a professional athlete,
rock star, best-selling authors, CEO, etc.
• This leads to an unequal distribution of earnings since
only a few people who try will succeed, many fail, and
even more don’t try.
• Random luck determines who gets a high wage offer in the
distribution of earnings for a given occupation.
16-54

55. Annual
earningsChance
Family background and
discrimination
Education
and training
Ability
The diagram suggests that ability and family background and
discrimination influence annual earnings directly and also
indirectly through their influence on education and training
Chance has only a direct impact on annual earnings

56. 3. Mobility Within the Earnings
Distribution
• Life-Cycle Mobility
• Earnings rise with age and then fall near retirement.
• Even if everyone had the same earnings stream over their career,
we would still observe annual earnings inequality since the work
force consists of workers of different ages.
• The inequality in annual earnings overstates the inequality in life-
time earnings.
16-56

57. Churning
• There is a lot of churning or year-to-year movement across
earnings categories independent of life cycle effects –salesperson’s
earnings in first year low, then picks up – performer earns high
income in one year and low income in another year
• The earnings mobility rates are lower for blacks than whites and
less in the lowest and highest earnings categories.
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58. 4. Rising Earnings Inequality: Wage
Inequality, 90–10 Ratio
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The 90-10 ratio
is earnings at the 90th
percentile divided by earnings at the 10th
percentile.
Household per capita income for those in the 90th percentile was, on
average, 26 times more per month than it was for those in the 10th
percentile in South Africa in 2008 (Finn et al., 2009:3).
Finn, A., Leibbrandt , M., Woolard, I. 2009. Income & Expenditure Inequality: Analysis of the NIDS
Wave 1 Dataset Discussion Paper, No. 5, Southern African Labour & Development Research Unit.
http://www.nids.uct.ac.za/documents/discussion-papers/96-nids-discussion-paper-no05/file

59. Why the Increase in Earnings
Inequality?
• De-industrialization
• The employment shifted to services sector away from
manufacturing sector
• Employment in services sector has a lower average wage and
higher wage variance.
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60. Why the Increase in Earnings
Inequality?
• Import competition and the decline of unions
• Increased import competition and the associated decline
in unionism has lowered the wages of less-educated
workers and thus raised inequality.
• Increased demand for skilled workers
• The demand for skilled workers has risen relative to less-
skilled workers, which has increased inequality.
• The demand for skilled workers has risen within industries
as firms have adopted new technologies.
• Product demand has shifted across industries towards
high-tech industries that employ more skilled workers.
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61. Why the Increase in Earnings
Inequality?
• Demographic changes
• The entrance of less-skilled baby boomers and female workers
during the 1970s and 1980s may have increased inequality
between new and experienced workers.
• The increased labour supply may have:
• increased the share of low-wage workers in all industries.
• depressed the wages of workers in low-wage labour
markets.
• It is likely that labour supply shifts played a small role since most
of the increase in inequality has been within each age group.
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