Does higher education pay? Yes, it does: In the modern
economy, employers are willing to pay a premium for work-
ers 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 2009, the premium for an
advanced degree had risen to over 112%.
Who decided that the wages of workers with advanced de-
grees 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 produc-
tion 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 re-
sources to firms and help ensure that those resources are
used efficiently.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?”
section
Factor
Markets
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Tod Bigelow/Aurora Photos Jon Feingersch/Corbis
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 dis-
counted value of the difference in lifetime earnings is as much as $300,000.