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Wage Differentials

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  • 1. Wage Differentials Differences in wages arising between individuals, occupations, industries, firms and regions.
  • 2. Reasons Why Wages May Differ?
    • Supply & Demand- there is a limited supply for certain professions such as barristers who require long and difficult qualifications along with work experience such as pupillages. This makes them difficult to substitute.
    • Therefore demand and supply are inelastic so wages are high.
    • Government policy-the government usually implements a minimum wage.
    • Trade unions can create a monopsony labour market which gives workers more power and can boost wages.
    • Esteem-some professions are held in high regard such as doctors.
  • 3. Demand & Supply for skilled and unskilled professions Wage Rate Quantity of workers Skilled workers Unskilled workers Skilled workers tend to have lower supply and are harder to replace with other factors such as machinery. This results in higher wages. Unskilled workers are more available resulting in greater supply and therefore lower wage. The amount of training required for a profession like this is limited. WS WU QS QU
  • 4. Discrimination
    • This is another factor why wages may differ between certain groups
    • Positive discrimination exists when certain groups of workers are favoured a lot more than others.
    • For example the government may positively discriminate workers in order to try and offset any negative discrimination such as an “Equal Pay and Flexible Working Bill”.
    • Negative discrimination exists when a certain group of workers are treated less favourably than others.
    • This could be due to ethnicity, age or gender.
    • This may cause labour market failures such as unemployment or undersupply of labour.
  • 5. Sex Discrimination
    • An example of this is evident in the city where women earn 60% on average of what men earn. There is also a 39% gap between the basic pay between men and women. In addition, there is an 80% difference in the amount of bonuses that men and women earn. This may be due to:
    • Human Capital - there are differences in education levels and work experience between men and women. It is calculated that a mid skilled mother of two loses an additional £140,000 of all her earnings after childbirth.
    • Part time working - Nearly 50% of women in the UK whose youngest child is under 5 are unemployed and those who do work 65% work part-time.
    • The Effects of Monopsony Power - Females are more likely to be geographically immobile as they are tied to their husbands’ place of employment, so they may be paid less than a competitive wage by a monopsonist employer.
    • However some women may leave their children in playgroups for the day or home with carers whilst they work. In addition, political parties such as the Conservatives are introducing an “Equal Pay and Flexible Working Bill”.
  • 6. MRP 1 MRP 2 (discrimination) W1 W2 Q1 Q2 Sex discrimination in the labour market Many employers feel the MRP of females is lower than it should be as they may take maternity leave. Wage Rate Quantity of workers
  • 7. Ethnic Discrimination
    • Ethnic minorities face two kinds of discrimination in the UK labour market:
    • Less access to higher status occupations than their white counterparts
    • Lower pay for a given job.
    • Despite record low unemployment, 4.4% of the white population are unemployed compared to 11.3% among Black and Asian people.
    • Ethnic minority workers in Britain are over represented in low paying occupations which employ 75% of males of an ethnic minority compared to 60% of Caucasian males. This may be due to the level of qualifications.
    • Fifty-two per cent of male Bangladeshi employees and self-employed work in the restaurant industry, compared to only 1 per cent of white men. High proportions of Indian and Pakistani women work in the retail trade, another low-paying sector.
    • However this may depend on how long a certain ethnic group has been residing in the UK as first generation workers may have labour intensive professions whilst their grand children may have higher paid professions due to the access of qualifications.
  • 8. In Conclusion
    • Workers that were previously considered to be skilled may now be replaceable by machine. This increases the elasticity of the marginal revenue product of labour.
    • In addition, there are other factors such as discrimination although the effects of some are being minimised by government influence such as equal pay bills.
    • To evaluate wage differentials in general, in a command economy the government may decide there should be no wage differentials resulting in everyone having the same wage.
    • Realistically it would not stand to reason having a highly skilled doctor, who had trained for many years getting paid the same as a cleaner who is relatively unskilled. Therefore wages could depend on the extent the economy is influenced by the government.