2. Suppose years of schooling, s, is the only variable that affects earnings. Th

Question

2. Suppose years of schooling, s, is the only variable that affects earnings. The equations for the weekly salaries of male and female workers are given by:

Wm = 500 + 100s

Wf = 300 + 75s

On average, men have 14 years of schooling and women have 12 years of schooling.

a.    What is the average male-female wage differential in the labor market?

b. How much of this wage differential is due to discrimination? Note that there are two possible ways to calculate this, so do it both ways and compare the two answers you get.

Explanation / Answer

(a)

Wm = 500 + 100s = 500 + (100 x 14) = 500 + 1400 = 1900

Wf = 300 + 75s = 300 + (75 x 12) = 300 + 900 = 1200

Average wage differential = 1900 - 1200 = 700

(b)

Wm - Wf = 500 + 100sm - 300 - 75sf = 200 + 100sm - 75sf [sm: Men's years of schooling, sf: Women's years of schooling]

(i) 200 out of total 700 of discrimination is autonomous & independent of years of schooling.

(ii) (100 x 14) - (75 x 12) = 1400 - 900 = 300 is due to difference in years of schooling.

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