Wage differentials according to experience are readily observable in
firms and occupations. To a significant extent, these differentials are a
response to human capital acquired on the job. For example, a civil
engineer with 20 years’ experience in bridge design will generally earn
more than a newly graduated civil engineer, even though they both have
the same formal education.
On-the-job training is important in creating rising wages for employees
and for making firms competitive. Evidence suggests that people who
miss on-the-job training early in life are handicapped relative to others
throughout much of their later working careers.
- Discrimination
Wage differentials can also exist due to discrimination in the labour
market, but care must be taken when interpreting the data. For example,
in 2015 the average female full-time worker in Canada earned
approximately 25 percent less than the average full-time male worker.
More detailed studies suggest that a significant part of these differences
can be explained by such considerations as the nature of the job and the
amount of human capital acquired through both formal education and
on-the-job experience. When all such explanations are taken into
account, however, there still appears to be a gap between male and
female wages that reveals gender-based discrimination.
To understand the effects of labour-market discrimination, we begin by
building a simplified model of a non-discriminating labour market and