Study notes

Labour Market - Wage Differentials

  • Levels: AS, A Level
  • Exam boards: AQA, Edexcel, OCR, IB, Other, Pre-U

There is a wide gulf in pay and earnings rates between jobs.

Some of the relevant factors are listed below

  1. Compensating wage differentials - higher pay can often be some reward for risk-taking in certain jobs, working in poor conditions and having to work unsocial hours.
  2. A reward for human capital - in a competitive labour market equilibrium, wage differentials compensate workers for (opportunity and direct) costs of human capital acquisition. There is an opportunity cost in acquiring qualifications - measured by the current earnings foregone by staying in full or part-time education.
  3. Different skill levels - the gap between poorly skilled and highly skilled workers gets wider each year. One reason is that the market demand for skilled labour grows more quickly than the demand for semi-skilled workers. This pushes up pay levels. Highly skilled workers are often in inelastic supply and rising demand forces up the "going wage rate" in an industry.
  4. Differences in labour productivity and revenue creation - workers whose efficiency is highest and ability to generate revenue for a firm should be rewarded with higher pay. City economists and analysts are often highly paid not least because they can claim annual bonuses based on performance. Top sports stars can command top wages because of their potential to generate extra revenue from ticket sales and merchandising.
  5. Trade unions and their collective bargaining power - unions might exercise their bargaining power to offset the power of an employer in a particular occupation and in doing so achieve a mark-up on wages compared to those on offer to non-union members
  6. Employer discrimination is a factor that cannot be ignored despite over twenty years of equal pay legislation in place

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