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SECTION 13

Factor Markets

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If you’ve ever had doubts about attending college, consider this: factory workers with only high school degrees will make much less than college grads. The present discounted value of the difference in lifetime earnings is as much as $1 million.
Wong yu liang/Shutterstock

Module 69: Introduction and Factor Demand

Module 70: The Markets for Land and Capital

Module 71: The Market for Labor

Module 72: The Cost-Minimizing Input Combination

Module 73: Theories of Income Distribution

Economics by Example: “Immigration: How Welcoming Should Lady Liberty Be?”

From Whence Wages Arise

Does higher education pay? Yes, it does: In the modern economy, employers are willing to pay a premium for workers with more education. And the size of that premium has increased a lot over the last few decades. Back in 1973 workers with advanced degrees, such as law degrees or MBAs, earned only 76% more than those who had only graduated from high school. By 2013, the premium for an advanced degree had risen to over 113%.

Who decided that the wages of workers with advanced degrees would rise so much compared with those of high school grads? The answer, of course, is that nobody decided it. Wage rates are prices, the prices of different kinds of labor; and they are decided, like other prices, by supply and demand.

Still, there is a qualitative difference between the wage rate of high school grads and the price of used textbooks: the wage rate isn’t the price of a good; it’s the price of a factor of production. And although markets for factors of production are in many ways similar to those for goods, there are also some important differences.

In this section, we examine factor markets, the markets in which the factors of production such as labor, land, and capital are traded. Factor markets, like goods markets, play a crucial role in the economy: they allocate productive resources to firms and help ensure that those resources are used efficiently.

Shakespeare wrote that “all friends shall taste the wages of their virtue.” This section concludes with a module focused on the marginal productivity theory of income distribution, which qualifies Shakespeare’s prediction with insights about the wages workers “taste.” How do they compare with the lowest wages that workers would accept? How do they compare with the workers’ contributions to revenue? And what controversies surround the markets for labor among other factors of production? Read on, or as Shakespeare said, “O, see, see!”