4. Wage Differentials

What are the Main Wage Differential Groups

Gender

Ethnicity

Regional

Skill Levels

Pros of Wage Differentials

Incentives to improve skills, training and qualifications

Trickle Down Effect (Higher wage earners spend their money inducing a multiplier effect, creating jobs and income for others which will also lead to higher tax revenue for the government)

Encourages Enterprise (entrepreneurs encourage to increase MRP to potentially earn large profits also resulting in job creation)

Encourages Work not Welfare (as improved skills means higher wages)

Promotes Efficient Resource Allocation (workers who have suitable skills for certain professions will move where the wages are higher)

Cons of Wage Differentials

Income Inequality (decreased government finances, less growth, social costs e.g. crime, divorce etc.)

Trickle Down Effect May not Occur (Rich Have a High Marginal Propensity to Save, (hot) money can leave the economy, offset by tax evasion)

Government Solutions Limited if they are the Monopsonist Employer as inflation will spiral (e.g. professions such as teaching and nursing)

Evaluation of Wage Differentials

Income Inequality - Compare Costs and Benefits

Risks of Government Failure (Is it worth intervening?)

Short Run vs Long Run

Reasons for the Gender Pay Gap

Women move in and out the labour force e.g. when having children (this can affect experience, skills and MRP)

Men are more attached to Work

The age of being economically active (the age that women leave the workforce normally to have kids is a key point of career acceleration and promotions to earn much higher wages)

Differences in Education/Qualifications (more so in developing countries)

Women work in Low Paid Occupations (e.g. part-time, service sector, public sector, vocational work, lack of trade union presence)

Discrimination

Reasons for the Ethnic Pay Gap

Minority Groups on average are less qualified (lower MRP)

Lack of language proficiency reduces productivity and employability, especially in higher paid occupations

Concentration of such workers in low paid sectors

Living in Poorer Areas of the Country

Reluctance to Migrate to Earn More

Discrimination

Reasons for the Regional Pay Gap

Restructuring of the UK Economy and different demand for labour (maybe more secondary sector in the North and Tertiary Sector in the South)

Negative multiplier/accelerator effects (labour is a derived demand)

Occupational and Geographical Immobility in the North

Migration of labour to more prosperous areas is only of the most productive workers

Reasons for the Skill Pay Gap (e.g. why do footballers earn more than teachers)

The MRP of footballers is very high (they can also bring in multiple revenue streams such as TV, merch, tickets etc.)

Low and inelastic supply of footballers and high demand for footballers

Monopsonist State Employer of Teachers compared to Limited Football Clubs

Vocational Element to Teaching - Negative Compensating Wage Differential (as a result of more holiday, better pensions etc.)

Reduced Bargaining Power of Teacher Trade Unions due to Reluctance to Strike

Lack of Homogenous Footballers