Labour Market: Wages & Trade Unions

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

The five main reasons different occupations earn different wages, and different workers in the same occupation are paid differently:

1. Skills, qualifications and training

Long training periods limit the supply of qualified workers. A doctor needs roughly a decade of training; a check-out assistant needs days. The doctor's labour supply is small, so the equilibrium wage is high.

2. Productivity and value of output

Some workers contribute more output, or output worth more in revenue, per hour. Employers are willing to pay more for them. A senior software engineer who can ship code that earns the firm millions is worth more per hour than a junior who is still learning.

3. Compensating differentials

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

4. Trade union power and professional bodies

Workers represented by a strong union or professional association tend to earn more than otherwise-similar workers who are not. Doctors, airline pilots and lawyers all earn more partly because their professional bodies restrict the supply of new entrants.

5. Discrimination and labour-market imperfections

Wage differentials are not always economically justified. Discrimination on the basis of gender, age, ethnicity, or disability can produce pay gaps that have nothing to do with productivity. The gender pay gap in particular is multi-causal: it reflects differences in industries, hours worked, career breaks, occupational segregation and direct discrimination.

A common slip: claiming all wage differentials reflect productivity. Some do; others reflect discrimination, market frictions, or compensating differentials. Wage differentials are not always "fair".