Workers & Wages

A wage differential is the difference in pay between workers in different jobs, or between workers with different characteristics in similar jobs.

Different occupations earn different wages, and different workers in the same occupation are paid differently, for several reasons.

1. Demand for and supply of labour

Jobs with long training periods have a small supply of qualified workers; if demand for that labour is also strong, the equilibrium wage is high. A doctor needs roughly a decade of training, a checkout assistant a few days, so the doctor's labour supply is small and the wage high.

2. Relative bargaining strength

Workers represented by a strong trade union or professional body can negotiate pay above the free-market level. Doctors, airline pilots and lawyers earn more partly because their professional bodies restrict the supply of new entrants. Workers with no collective representation have weaker bargaining power and accept lower pay.

3. Compensating differentials

Dangerous, unpleasant, anti-social or remote jobs must pay extra to attract anyone at all (offshore oil-rig workers, night-shift nurses, deep-sea trawler crews). The extra pay is the compensating differential.

4. Discrimination and government policy

Wage differences are not always economically justified. Discrimination on the basis of gender, age, ethnicity or disability can produce pay gaps unrelated to productivity. Government policy, such as a national minimum wage or equal-pay legislation, also shapes wages, especially for the lowest-paid.

5. Economic sector and public or private sector

Economic sector. The sector a worker is in affects pay through the skills that sector needs and the value of what each worker produces. Much primary-sector work (subsistence farming, basic agriculture) needs few formal qualifications, so the supply of workers able to do it is large, and output per worker is often low in value, so pay is low. Secondary-sector wages vary with capital intensity: a worker operating expensive machinery produces far more saleable output per hour than one doing simple assembly by hand, so is in stronger demand and is paid more. The tertiary sector spans the widest range of all, from professional services such as law, medicine and finance, where long training keeps the supply of qualified labour small and pay high, to retail and catering, where little training is needed, supply is large and pay is low. In an answer, say that the sector changes the skill requirement and the value of output per worker, and that it is those two things that move the demand for and supply of that labour. The sector label on its own explains nothing.

Public or private sector. Public-sector pay is set by government out of tax revenue, usually on national pay scales negotiated with trade unions, so it is more standardised across the country and it is capped by the government's budget rather than by what the worker earns for an employer. Private-sector pay is set by the firm's profitability and by demand for its product, so it can rise well above the public-sector equivalent where profits are high, and fall below it where they are not. Public-sector jobs also tend to carry stronger non-wage benefits such as pensions and job security, which act as a compensating differential in reverse: workers accept a somewhat lower wage in exchange for them, the point made in section 2.