Wage differentials is where different wages are paid to different workers depending on differences in occupations, gender, age, race, trade unions and political party. However, the differences inMwages may be between jobs or within the same job.
Causes of wage differences in an economy
- Differences in the level of education and training. Workers who spend longer periods at school such as degree holders earn more wages because of the high skills possessed than diploma holders who spend fewer years at school but are serving in the same occupation or industry.
- Differences in the cost of living. Workers who work in areas where the cost of living in high such as urban centres earn higher wages to enable the work attain reasonable welfare than those serving in areas where the cost of living is low such as rural areas.
- Differences in the level of talents and natural gifts. Highly talented workers such as Musicians, painters, professional footballers and athletes’ earn more wages because of r.cir innate abilities that make them contribute more to output than the less talented workers even in the same occupation whose contribution to output is low since they are gifted.
- Differences in the nature of the jobs. Workers employed in highly risky jobs such as pilots and miners are paid high wages than those who work in less risky jobs such as white collar jobs, in order to compensate workers serving in risky jobs for the high of health which they bear.
- Differences in the level of experience or seniority or responsibility. Workers who have worked for long in the same occupation earn high wages than those who have just joined the industry because senior employees need limited further training and supervision.
- Differences in the bargaining strength of the individual workers. Workers who are more eloquent in asking for higher wages are paid much more highly because of their ability to convince employers to pay them high wages than the less eloquent ones are poor at bargaining for wages.
- Differences in the number of hours worked or time spent on the job. Workers work longer hours put in more effort and produce high output hence earn more inc than those who put in less effort by working for shorter hours when the time rate me of paying wages is used.
- Differences in the strength of the workers’ trade unions. Workers that belong to strong trade unions, that are capable of negotiating for wages for their members, higher wages than workers who belong to weak trade unions or un-unionised workers that cannot bargain for high wages.
- Differences in the ability of workers to do work or differences in quantities output produced. Workers who are hardworking produce large quantities of work therefore earn higher wages than the lazy workers who produce lesser quantities of output when the piece rate method of paying wages is used.
- Differences in government policy on wages. Government pays different wage rates different officials even when the officials have the same levels of education, experience and seniority. This is done to attract highly skilled workers to a particular industry or to promote integrity of the workers who are well paid.
- Differences in the elasticity of demand for the final product that labour helps to produce. Workers who produce products that are demand inelastic earn higher wages than those who produce products which are demand elastic. This is because prices products which are demand inelastic can be increased in order to earn wages for the workers that produced them whereas it is not possible to increase prices for products which are elastic in demand.
- Discrimination in the labour market in terms of race, sex, tribe or region Workers who are favoured by their employers on account of their race or tribe or religion or sex earn higher wages than those disfavoured by the employers even though they are doing the same job.
- Differences in employer’s ability and willingness to pay. Different employers have different abilities to pay and workers being employed by the different employer or occupations earn differently.
- Differences in the elasticity of supply of labour to an occupation. Labour w inelastic in supply to an occupation such as highly skilled labour earns higher wages than labour which is elastic in supply to an occupation such as semi-skilled and unskilled workers especially when forces of demand and supply of labour influence wage rate.
- Differences in the degree of substitutability of labour by machines. Labour which is easily substitutable by machines such as unskilled labour earns lesser wages than professionals who are not easily substitutable by machines because their work involves either a very high degree of human touch or judgement.