Wage Differentials

• What is meant by the marginal cost of employing labour?

  The marginal cost of employing labour is the change is the total costs from employing one extra worker.
• What are the key causes of pay differentials in the labour market?

  • Compensating wage differentials
  • Reward for human capital
  • Different skill levels
  • Differences in labour productivity and revenue creation
  • Trade unions
  • Other artificial barriers to labour supply
  • Employer discrimination
• Why is ’compensating wage differentials’ a cause of pay differentials in the labour market?

  A reward for risk-taking, working in poor conditions and during unsocial hours.
• Why is ’reward for human capital’ a cause of pay differentials in the labour market?

  Differentials compensate workers for (opportunity and direct) costs of human capital acquisItion.
• Why is ’different skill levels’ a cause of pay differentials in the labour market?

  Market demand for skilled labour (with inelastic supply) grows more quickly than for semi-skilled workers.
• Why is ’differences in labour productivity and revenue creation’ a cause of pay differentials in the labour market?

  Workers whose efficiency is highest and ability to generate revenue for a firm often rewarded with higher pay.
• Why is ’other artificial barriers to labour supply’ a cause of pay differentials in the labour market?

  e.g. professional exams
• Why is ’employer discrimination’ a cause of pay differentials in the labour market?

  A factor that cannot be ignored despite over twenty years of equal pay legislation in place.