Wage Differentials

Question 1

What are wage differentials?

Answer 1

The difference in wages amongst workers

Question 2

Why is there no wage differentials in the long run in a perfect competitive market ?

Answer 2

In a perfect labour market with perfect labour mobility there would be no wage differentials in the long run
For example, if there were higher wages being paid to pilots and lower wages being paid to bricklayers, more bricklayers would train to become pilots. This would reduce the supply of bricklayers and increase the supply of pilots until wages fully equalise
However, this is extremely unlikely to be the case as there is plenty evidence to suggest wage differentials persist and wages do not equalise in the long run
Therefore, there must be reasons for observed sustained wage differentials

Question 3

What are the causes of wage differentials?

Answer 3

1.Monopsony power
2.Trade union power
3.differences in skills/qualifications i.e different demand and supply conditions
4.occupational immobility
5. Geographical immobility
6.Wage discrimination
7.government intervention
8.Labour productivity differences in MRP
9. Alternative objectives of workers/ employers
.

Question 4

How does monopsony power of the employer lead to wage differentials ?

Answer 4

This is a situation where a monopsony seller can exploit their dominant position in a labour market and force down wage rates
if a firm is a monopolistic or oligopolistic seller in a product market it is far more likely to be a monopsony buyer of labour in a labour market
The monopsony buyer will set the wage to W1, the minimum required to attract Q1 workers. This is where the MC = MRP and profit maximising position
This may explain why employees in industries where the labor market is less competitive may receive lower wages than competitive labour markets

Question 5

How do trade unions lead to wage differentials ?

Answer 5

Trade unions protect interest of members through collective bargaining. Trade union can act as a single seller of labour negotiating wages for all member employees. however, many workers in low paid jobs may not have trade union acting on their behalf
Successful trade union wage negotiation may also increase wage differentials. Trade union may lead to a restriction of employment of labour to Q1 by negotiating high wages (WTU) above the market equilbrium wage We. There may be wage differentials between workers well represented by unions and workers without collective bargaining
EV: However, successful collective bargaining to protest the union members from the potential monopsony power of employers, may reduce mage differentials

Question 6

How do skills, qualifications lead to wage differentials ?

Answer 6

Higher skilled workers are likely to be more scarce due to the difficulty or the time required for acquiring the skills to be in that occupation
Therefore, the supply of labour for for professionals (SP) is likely to be proportionally less responsive to proportional changes in the wage rate
In additional demand (MRPL) tends to be higher for professional workers as the MR or the MPP for a professional is likely to be greater. This is highly likely lead to lead to wage differentials where higher skills leads to higher wages for skilled/professional workers (W2 or Wp) than those earned in markets where lower skilled workers are sufficient (W1 or Wu)

Draw the one on the right ideally. If drawing diagrams on the left ensure to extend the wage across

Question 7

How does occupational immobility lead to wage differentials ?

Answer 7

Occupational immobility is when workers are not willing and/or not able to move between different types of work (occupations).The primary cause is a lack of transferable skills; some occupations require specific skills
Lack of training by firms - though firms can spend on training for workers to acquire skills they may choose not to in fear of carrying the costs of training, for workers to then be ‘poached’ by other firms
Lack of training by workers -Workers may find the costs of training a barrier to entry to the labour market due to high costs accociated with training to acquire work
Other factors that can cause occupational immobility: Age, qualifications required, personality traits expected, specific health requirements
Older workers may be less willing and able to train than younger workers

Question 8

How does geographical immobility lead to wage differentials ?

Answer 8

Where workers are not willing and/or not able to move between different regions for work