Chapter 19

# Earning 1: The Wage Structure

## Quantitative Problems

1. There are two groups of workers: group A earns $18 per hour, and group B earns $20. Relative to group A, what is the percentage wage gap? Use the calculator on your computer to calculate, ln 18 and ln 20. Evaluate 100(ln 20 – ln 18) and comment on your answer. |

2. I choose this topic, not to offend, but because I believe inequality is an economic "good" that has received too much bad press. I also think you will agree that it is a good, which like any other, can be scarce or overly abundant.Discuss. In his 1999 presidential address to the American Economic Association, Welch (1999) delivered a speech titled "In Defense of Inequality." In it he remarked, |

3. z% of individuals earn a wage that is less than or equal to . In 1990 it was observed that . How would you characterize the earnings inequality in this economy? Suppose that 10 years later, it is observed that . What happened to inequality over the period? Suppose that |

4. What is meant by the Lorenz curve and what are its three main properties? Depict the Lorenz curve in an economy in which everyone has exactly the same earnings. What is the Gini coefficient in this economy? |

5. Hint: The Lorenz curve is , where y is the percentage of total income accruing to those living in houses numbered 1 through n. Also, the area under the Lorenz curve is .) A hundred different households live in houses numbered 1–100 that lie along a given street. Remarkably, those who live in the 1st house earn $1, those who live in the 2nd earn $2, and so on and so forth for all of the houses up to the 100th. What is the Gini coefficient for the group? Does it indicate that inequality is high, low, or moderate? ( |

6. The 1960s–1980s were golden years for musicians. Developments in sound recording technology (as the LP gave way to the cassette, which, in turn, was superseded by the CD) allowed them to reach ever larger audiences and do so more cheaply. Discuss how these changes might have affected the industry. Technological advances are, however, a double-edged sword. The last two decades witnessed the widespread use of the PC, the explosive growth of the Internet—with its point and click capabilities— and the iPod. How have these subsequent changes affected the industry, and how have musicians responded? |

7. The 1980s and 1990s witnessed a substantial decline in the real value of the minimum wage. What effect did this have on inequality? |

8. Use the supply-demand-institutions (SDI) framework to explore the effects on inequality of a sharp increase in the number of low-skill immigrants entering the United States. What would happen if, over the same period, there was a pronounced increase in the demand for skilled workers? |

9. What factors might account for the increase in the earnings of college-educated workers vis-á-vis high school graduates and dropouts over the last three decades? |

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