Introduction
There exist multiple factors that influence the level of reward paid to different workers. The wage rates, just like prices of other commodities are greatly determined by the forces of demand and supply. The kind of economic significance attached to wage differentials cannot be overlooked since they have a direct influence on the distribution and allocation of economic resources. Workers with equal abilities in a competitive market receive rewards that are meant to cancel out the non-wage differences between their jobs. These differentials represent the variability and diversity of abilities of different workers both physically and mentally to contribute to the productivity and efficiency. These differentials can be analyzed as follows.
Compensating differential
The entire labor market is characteristic of different types of jobs and wages. The equilibrium of the labor market is influenced by the characteristics of the jobs that different workers undertake according to Adam Smith. Non wage characteristics of a job such as how pleasant or unpleasant or risky a job is result in the compensating wage differentials so as to compensate the workers. The compensating wage differentials seek to pay for non-cash working conditions to equalize the non-cash differences such as risks associated with a particular job. For example if a job is referred to as being unpleasant or risky, the employer must pay a higher reward to attract employees whereas a lower perk should be offered for less risky jobs. Assuming the utility function of a worker is,
Utility =f (W, D)
Where D is the risk of injury and W is the wage. ("Gatton College of Business and Economics - University of Kentucky", 2016)
The trade off revealed by these indifference curves shows that as the level of risk of injury rises for all levels of utility, U1, U2, and U3, the corresponding wage rate rises too.
(Retrieved from http://gatton.uky.edu)
The compensating wage difference for high probability of injury (1) and a lower risk (0) in the case of the graph above is equivalent to Z. The unit difference in the risk of injury is compensated by the wage difference (W1-W0) for both workers whose jobs have different risk levels to derive equivalent utilities (U1). W1-W0 gives the workers reservation price for the worker to forego a unit probability of risk. The greater the risk associated with a particular job or the dislike of the worker for the job, the higher the level of reward required convincing the worker to take the job.
If there are two types of jobs in the labor market, safe jobs and risky jobs, if workers in the two different risk level jobs are to receive the same level of utility, the risky jobs must pay higher than the safe jobs. An example of compensating differential in real life situation is a case of a cleaner and a motor bike rider. The rider is faced with a high risk of road accidents which is not the case for the cleaner. In this case, the rider might receive a higher wage to cater for the risk involved on the road.
The equilibrium wage differential and the wage paid thereof is equivalent to the demand and supply of the labor. It strikes a balance between the workers and the employer firms. The workers who have a higher liking for the differential will secure jobs with the employers who offer the same at their lowest cost. (Massey University, 2016)
Education and qualification/ occupational wage differentials
This is inclined to the premise that different levels of various professions require certain types and levels of trainings. All types of trainings are usually associated with some kinds of costs either monetary or non monetary on the part of the trainee. Whenever people incur such costs, they obviously expect a reward for the same at a future date, in employment.
The kind of training required to produce a professional in a particular job could also be a sufficient reason for differences in the levels of wages paid to the workers. For instance, it takes more than ten years of training to make one a surgeon whereas a sales person can graduate in less than two years or even work while in school. The length and kind of training required for certain professions limits the labor supply in the market and the market forces of demand and supply make these kinds of workers to be highly paid. The cause of a higher wage rate for individuals with higher training is that there arises an opportunity cost due to the income the person loses during the lengthy stay at school/ college. The high wage rate comes in as a form of compensation for the opportunity cost. The demand for a worker is usually a direct function of the products or services provided by the individual. If an individual’s services are utilized in the provision of a product or service that has a high demand, such an individual will be highly demanded and thus command a high wage rate. (Quintana-Domeque, 2010)
Marginal revenue and discrimination
If the employers feel that a particular group or type of workers will be less productive than others, it forms a sufficient basis for wage rate differentials between such workers and those who are perceived to be more productive. A good example is the case of women in manual labor employment. As a matter of fact women may at time go for maternity leave hence affect their productivity. The employer may in this case offer a lesser pay to a woman so as to act as a buffer their finances and business productivity at such times as maternity leave. Other workers also earn higher wages due to the nature of the work they do. Some works involves transactions whose economic value is too high marginal revenues. Discrimination in wage rates can be categorized into two categories: positive and negative discriminations. The latter occurs when a particular group of people are treated more unfairly that another group while the former occurs when a particular group of workers is treated more fairly that another. If discrimination of either kind occurs, the victim workers will definitely receive different wage rates from those received by similar workers who are not affected by the discriminatory move. (Tachibanaki, 1998)
Marginal revenue productivity of different workers can also be a reason for wage differentials where the workers are purely rewarded according to their performance. Wage differentials that arise from performance pay reward schemes are common where people are paid commissions, bonuses, royalties, bonuses and efficiency wages. In such a set up, rewards are based on individual performance and thus wage differentials since different people have different working abilities.
Imperfect information
According to the law of demand and supply that is practicable in competitive labor markets, workers will tend to shift to jobs with higher wages from those with less pay. The validity of this premise is however dependent on the availability and symmetry of information about the new opportunities to the workers. It can only be true if based on the assumption that all workers receive the same information about the new opportunities. If some individuals get such jobs from informal links such as friends and family, wage differentials will be inevitable for the same kind of jobs.
The absence of perfect information about the existing opportunities in the job market sets up an imperfect of unfair competition that favors some people and does not favor others. It creates a temporary monopoly in the labor market and as such, only those with the information grab the existing opportunities which could be earning more than opportunities occupied by people with similar qualifications but do not know about the new opportunities.
Policy and regulations
Protection policies such as those presented by trade unions have been empirically verified to be a reason for higher wage rates. This implies that those workers who serve under the umbrella of a trade union have a stronger bargaining power for better pay than those employees who rely on individual bargains or performance appraisals.
Immobility/ Locality
All kinds of jobs offer different perks depending on the location of the job. These differentials are usually attributed to various factors that differ from one location to another such as costs of living. People working in hardship areas also tend to be paid higher than their counterparts in favorable areas of work. Immobility arises in cases where the workers may be unwilling to relocate due to some factors such as family ties and licensing. Such workers may be paid higher salaries as a means of persuasion to relocate to the new job location. In this case, the relocating workers will be earning higher than their counterparts; an opportunity cost for the relocation.
References
Gatton College of Business and Economics - University of Kentucky. (2016). Gatton.uky.edu. Retrieved 3 May 2016, from http://gatton.uky.edu
Massey University, N. (2016). Massey University, The engine of the new New Zealand - Massey University. Massey.ac.nz. Retrieved 3 May 2016, from http://www.massey.ac.nz
Tachibanaki, T. (1998). Wage differentials. New York: St. Martin's Press.
Quintana-Domeque, C. (2010). Preferences, Comparative Advantage, and Compensating Wage Differentials for Job Routinization*. Oxford Bulletin Of Economics And Statistics, 73(2), 207-229. http://dx.doi.org/10.1111/j.1468-0084.2010.00613.x
