Question

1. Suppose there are two types of workers in the economy, A and B. Assume that type A workers are, on average, more productive than type B workers (for instance, type A workers might have access to better schools than type B workers). Explain how it could be the case that some firms choose not to hire type B workers, even if: (a) qualified type B workers to apply for open jobs, and (b) the firms are prejudiced in any way.

   1. Hint: Such a situation could not occur under perfect competition, so you should identify an imperfection in the market that could give rise to this outcome.

2. In the paper A Grand Gender Convergence, Claudia Goldin argues that most of the residual wage gap is determined by nonlinearities in the hour/wage relationship.

   1. First, discuss what is meant by the "residual wage gap." Then describe what these nonlinearities are, and how they affect the gender wage gap.

Answer 1

a)With reference to the above situation, consider a case where Type A workers are more productive than Type B workers and at an instance, both applied for a job. According to this instance, both are qualified and the job is open to all. Now, from the perspective of a firm, the prime motive of a firm is to make profits. In order to maximise profits, a firm always requires workers who are more productive and skilled. Thus during the process of recruitment, the prime focus of the firm would be to analyse the productivity capacity of an individual. In this case, although both type of workers are qualified, the firm would still opt to chose Type A workers over Type B workers since the former has more productivity capability and the firm would expect the former to bring more profits to the company. By selecting Type A workers, the company would have to spend only a little time in building up the employee to be industry capable and hence would help in reducing the incidental cost of the firm. Since we have a competitive market, firms could not take risks on recruiting its workers, since an unproductive qualified worker would not be competitive in such a market and hence may result in loss of profits to the firm.

b) In this case, the firm is prejudiced about Type B workers. Here, the firm believes that Type A workers who are seemingly productive would bring more benefits to the firm and hence would risk to avoid Type B workers. The firm assumes that in such a competitive market, hiring Type B workers would bring more complexity to the marketing strategy of the firm and would result in decreasing the profit making capability of the firm. Thus, the firm may restrain from selecting Type B workers.

                                    A Residual wage gap represents the difference in wage distribution in a firm or an organization due to gender, age or experience differentiations. The following may be considered as non-linearities in the firm

· Women may take more time off the firm for family matters and hence may get penalised for it.

· Workers who are less experienced may take more time to finish off a task than those who are experienced and this may result in less experienced people spending more time with the firm

· With lesser age, the effort to finish off a job may be more which would result in more effort requirements for them

· Gender differences also may cause the workers to put in differentiated efforts to finish off a task.

                                    With reference to the above non-linearities, it can be seen that most of them are indirectly or directly linked to the gender differentiations. Hence, in a firm gender differences plays a key role in increasing the residual wage gap.