Tuesday, December 30, 2008

Why Wage Differentials Exist In Labour Market?

In Labour Economics, it is often assumed that the labour market is perfectly competitive:

(a) There are many hirers or employers (buyers) & many potential workers (sellers). Each of them is small enough & thereby unable to exert any power onto the market. As such each market participant is a wage-taker

(b) All labours are homogenous

(c) Both employers & employees have perfect knowledge of market conditions

(d) There is no government intervention

However these conditions are just a proxy & a satisfactory model to the real situation. In reality, we know that labours are not homogenous. A farmer will not be able to become a doctor or a pilot. The same goes for wage-taking. In real life, some employers have monopsony power & as such they can command the wages that they are paying. Also we have strong labour unions that can restrict the supply of labour into certain market. Government also can intervene in the labour market e.g. imposition of National Minimum Wage (NMW)

Why wages differ so much between individuals?

(1) Age. Older workers are paid much higher salary since they are likely to have much experience over the young ones. Experience is important since it could lead to better knowledge of working conditions, effective decision making etc

(2) Sex. Women are traditionally paid lower than men due to many factors. For instance, women are highly concentrated in sales-related jobs e.g. shop assistant, in-out of job too often due to maternity, lesser education etc whereas men are more into professional areas e.g. specialist doctors, taking stressful jobs e.g. investment banker etc . Although the trend is less apparent in the present, still the concept of glass-ceiling appears everywhere. Women are denied the role of leadership in many positions. We will talk this in greater detail next posting

(3) Ethnic. Racial discrimination still appears in workplaces although governed by 1976, Race Relations Act & Commission for Racial Equality. The minority ethnics are very often denied the chance of climbing up corporate ladder. However one could also argue that other ethnics may treat English as their secondary language especially immigrants. Also they receive lesser formal education compared to the Whites

(4) Personality. Different people have different mentality, attitude & aptitude towards work. Some are hardworking while some others are lazy. Normally those who are highly capable will command great attention & care from their bosses. No doubt, one could also argue that political skills in office could be a much greater influence in determining one’s position

(5) Different MRP (marginal revenue product of labour). MRP means an additional revenue gained by selling extra 1 more unit of output. It is also the demand curve for labour. MRP is closely associated with MPP (marginal physical product) & MR (marginal revenue). It is given by MPP = MRP x MR

MPP means additional output by hiring extra one worker) & MR means additional revenue due to extra one unit of output sold. As such workers with higher productivity tend to get higher salaries. The same goes for those who produce profitable goods. For instance heart specialist or professional footballers like Beckham are highly paid due to their high MR

(6) Nature of jobs. Wages are only signal for allocation of labours. In reality when one choose a job, they will look at many other factors for instance level of stress, perks such as company cars, danger involved, health benefits etc. Other things being equal, jobs with unpleasant environment will have to pay higher to attract workers. For instance, working as an investment analyst in Swiss Bank will likely pay higher than a teacher given the challenging nature of finance e.g. high stress

(7) Backed by strong unions. Trade or labour unions are organisations where workers group together to further their interest. They often have strong influence over they pay of their members since they bargain collectively rather than individually. More often than not, this will result in exorbitant rise in production costs for employers. UAW (United Auto Workers) for the Big 3 is a good example. What they normally do is restrict the supply of workers in certain industries to drive wages up. Also union workers often have higher pay than non-union workers

(8) Powerful corporations. Meanwhile, there are also some firms which are very influential. They hold the monopsony power as the single buyer of labours. These types of firms are able to set their own wage rather than employing at the going-wage rate as in perfectly competitive labour market. They may have the power to drive down wages. Those employed in such industries may have a lower pay scale on the average

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