CHAPTER 12 Wages, Workers, and Management

Few workers stack money as fast as Beyoncé.

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Chapter Objective

Understand why wages vary.

• 12.1 Labor Demand: What Employers Want

  Learn what skills businesses want from workers.

• 12.2 Labor Supply: What Workers Want

  Discover how wages depend on the characteristics of the job.

• 12.3 Institutional Factors That Explain Why Wages Vary

  Assess how regulations and institutions shape wages.

• 12.4 How Discrimination Affects Wages

  Evaluate how discrimination affects outcomes in the labor market.

• 12.5 Personnel Economics

  Learn how smart employers get their workers to do more with less.

Beyoncé earned $105 million in 2017. That’s $2 million per week, or roughly $25,000 per hour even if she is working 80 hours a week! By the time you finish reading this page, Beyoncé will be around $400 richer. But for Peta Milovsky, it’s a different story altogether. She works as an elder-care aide, for which she gets paid the minimum wage. Even working full time, she earns only $290 per week, or roughly $15,000 per year. After her commute and child care costs, she has to figure out how to pay her rent and support her two kids with only $189 per week.

Many people think that looking after the elderly is more important than pop music. So why does a singer get paid 7,000 times more than an elder-care worker? While these two represent the extremes, there is enormous variation in the distribution of earnings in between. Supply and demand gives you the framework to analyze what drives these differences, but exactly what is it about the supply and demand of singers versus elder-care aids that leads to these differences? What are employers looking for in workers? What are workers looking for in jobs? And how do these factors come together to cause some people to earn more than others?

Beyond supply and demand, government and other institutions also influence labor market outcomes. If you’ve ever worked a minimum-wage job, you know that it was the government, not the laws of supply and demand, that set your wage. Governments also influence the labor market by setting training and experience requirements to work in some occupations. The government also sets the rules under which employees and employers can bargain over wages and working conditions. The outcome might result in workers forming a union, which is another type of institution that shapes labor market outcomes. Finally, all businesses want to hire productive workers, but it turns out that they can also create more productive workers through better management practices. And so we’ll conclude this chapter by examining management practices that work, and some that can backfire.