Some Labor Economics

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An inquiry arrived asking this question:

“I still do not understand why my labor as a registered nurse would be worth less than a man who is a registered nurse. If both of us graduated with the same degree with similar grade point averages and perform the same job and are equally reliable, why should I get paid less because I am female?”

Explaining the ins and outs of wages is a daunting task that cannot be done in one short blog. Even if I succeeded, I’d probably fail to convince anyone who did not already understand how markets work. I myself had a whole course on labor economics from Harry Gilman, a labor economist. Prof. Gilman (1926-2001) was a Polish Jew. “He spent World War II in Jewish ghettoes in Lithuania and Latvia and in Nazi concentration and labor camps. He immigrated to the United States in 1946.” He was a Chicago economist who had been around and through a lot. He knew his microeconomics. He passed on what he could to his students.

I’ll briefly pass on a few items from me and from others who have written to me after I wrote a post on equal pay for equal work.

There is a huge difference between “would be worth less” and “should get paid less”. Why is Alaska the number one state in earthquakes, while Florida has so few? This is like asking why a plumber averages $49,000 a year and a painter averages $35,000. There are “forces” out there that make these things happen and we wonder what they are. The questioner thinks that 2 forces are involved: GPA in school and performance on the job. And, in some cases, maybe that’s all that matters. However, even in that simple a case, there is variation among schools, their training, and variation on performance on the job.

Understanding the factors that cause prices (wages) to be what they are, like forces of nature, is one thing. Saying what they should be is entirely different. Granted, human beings have some strongly ingrained notions of fairness. Would it make sense to ask why Alaska should have more earthquakes than Florida? I would not ask that question. I don’t think human ideas of fairness and justice apply to such a matter. I would not answer that Alaskans are more sinful or that God is punishing them, which is where such questions sometimes go. The earth is headed for cold, dark, death and desolation when the sun burns out, or sooner if a catastrophe intervenes or mankind does something that destroys the planet or even the universe. Do we ask why this should happen? If we do, we are unlikely to come up with satisfactory answers.

I look at prices in the same way, as akin to forces of nature, where asking what should be a price cannot be answered satisfactorily. What is the thing that’s akin to a force of nature in this case? It’s that the price is an outcome of supply and demand, and each of those is caused by innumerable decisions being made constantly by innumerable human beings, each of whom has his and her own unobservable values and reasons for deciding as they do. It is impossible to second-guess them when you do not know what has gone into their decisions. It makes no sense for you to say what the price should be, based on some limited ideas you have about what should determine prices. It makes no more sense to say that woman RNs should have the same pay as men RNs than to say that Alaska should have the same number of earthquakes as Florida. In fact, the likelihood is that it is more reasonable to guess that their pay will be different, simply because the odds are that there will exist some factor that is causing this at the margin.

Even in free markets, specific wages for specific occupations in specific regions for specific people are established in complex ways. In real world markets that are not free, the complexity is no less large.

Wages are not a question of “should”, or right or justice or fairness, because that’s not how prices are set in markets. Suppose a female RN is paid less. Why does she and other women accept those wage bargains? How can the employers get away with it if they do not form a combine to exploit them? If their labor is really undervalued, why doesn’t some profit-seeking employer bid for women only and thereby lower his costs? If enough do that, they will raise the female wage to parity with men. If they do not do this, why not? Is the market for their labor being restrained somehow?

The answer to prices and prices of labor is to be found in hidden factors that are not clear to anyone, but about which we can only speculate. They vary with occupation and markets. They are complex. The price for RN labor is going to depend on more than the 2 factors mentioned, which are GPA and performance. Even those 2 are by no means obvious because there are many schools, many parameters of performance, many regions, and many local conditions of supply and demand. It’s going to depend on the supply of women and men for that job, on the willingness of people to move to other regions, on the local demand conditions of hospitals, on the odds of someone changing jobs, on employers that spend money on training that an employee can take with them by moving, on the employee’s permanence in a job, on working full versus part time, etc.

Supply peculiarities can be important. If women tend to flock to nursing, then their pay might be lower in that occupation. Conversely, men’s pay might be high if a male nurse is valued for intangibles or for doing certain tasks that the employer wants done by men.

Rates of pay vary greatly not only by sex but by age, experience, training and occupation itself. Why might carpenters get $20 an hour and electricians $30 an hour and plumbers $50 an hour? Why might a roofer get less for appears to be a more dangerous occupation? It might be that more young men are willing to become roofers for a host of reasons, including the low training requirements or the hours of work or their low risk aversion. Some jobs require travel. Some require certain kinds of tools. Some require clothing. Some call for heavy lifting. Some call for manual dexterity that may favor one sex. Some call for dealing with children, others require speaking skills, or the use of a telephone. People may or may not wish to move or migrate. This is going to influence labor supplies in particular regions. People self-select into jobs. If the self-selection happens to be correlated with sex, then sex and pay scale will be correlated.

People select also according to what’s in their region, or they may choose a region according to their previous training. A black man named Jan E. Matzeliger worked in a Lynn, Mass. shoe factory. He invented the automatic shoe lasting machine and made Lynn a shoe-making center. Consequently, many women of low means and schooling were attracted into this factory work.

I distrust all statistical work purporting to show pay scale differences or pay gaps, especially when they’ve been around for a long time and employers know about them. If competition has not eliminated them and overcome any supposed discrimination, I’m inclined to think that the empiricists have missed something.

A correspondent offers these observations:

“1) With roughly equal numbers of men and women in the work force (+/- 4%), about 92% of workplace fatalities are males. In other words, across all jobs, men are more than 11 times as likely to be killed on the job as women. This is largely explained by the predominance of men in the most dangerous professions, such as commercial fishing, logging, mining, roofing, etc.
2) Esthetically undesirable jobs are also dominated by men. Think about sanitation workers, sewage workers, plumbers, etc.
3) Within professions where individuals work a variety of weekly hours, men invariably work longer hours on average than women. (I’m thinking of a study about primary care physicians which demonstrated this.)
4) Because more women take time out for child rearing, women on average have less experience than similarly-situated men.
5) Since women live, on average, slightly more than five years longer than men, ALL standardized retirement programs discriminate against men. Women pay the same into such programs, but receive significantly greater benefits. This advantage in work benefits includes everyone in the Social Security system, Medicare, all public school teachers, government workers, union workers, etc.
6) Up until the past decade, women have constituted a gradually increasing proportion of the workforce. This means that within large organizations, the most experienced people, at the highest levels, are more likely to be men (simply because more men were starting work 30-40 years ago.)”

In my profession, which was academia, I recollect a study showing that female professors published less than male professors. Salary depends on publication.

In some cases where political correctness rules, certain groups may be overpaid because they are prized as catches that meet informal quotas or hiring goals.

Complexity rules in the setting of pay for work. Labor is not some sort of homogeneous commodity that is being priced. Labor is not a specific grade of wheat or gold of a certain fineness. It is quite impossible to say what someone’s pay should be. Pay is established every day in many inter-related markets, going even worldwide, wherein bids and offers clear markets in ways that are impossible to second-guess.

Government interference in labor markets is a key factor making for economic inefficiency. The strength of the American economy as compared with many foreign economies (in Europe especially) has been attributed by some economists to its relatively free labor markets and the weakness of unions in causing prices to depart from market-clearing prices. However, there have also been some clear cases where union strength and government rules that favor unions have harmed whole industries.

Equal pay for equal work is one of those political economic slogans that sounds attractive to people’s sense of fairness, but actual implementation introduces market inefficiencies and, carried far enough, has long-term damaging effects to an economy.

10:48 am on February 2, 2014