In this article we will discuss about horizontal and vertical differences in wages.
‘Horizontal’ Differences in Wages:
Suppose, workers are all alike in skill, training and efficiency. Even in this case wages may differ. ‘Money wages’ do differ from ‘real wages’. The money wage is supplemented by certain extra benefits (like subsidised food, medical facilities, etc.) which are offered to workers.
On the other hand we must deduct certain occupational expenses (like expenses on uniform, travelling expenses, etc.) from money wages to arrive at real wages. Nominal wages also differ from real wages if there is scope for overtime work. In reality differences in nominal wages between occupations and places may be quite consistent, therefore, with equality of real wages.
The following factors deserve mention in this context:
1. Net Advantages:
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In practice, workers may accept comparatively low wages in one place (or occupation) because of some compensating advantages which they enjoy over places and occupations where wages are higher. For example, there may be opportunities of supplementary jobs either for the worker or for his family. This is why most people prefer low-paid jobs in cities.
A. C. Cairncross has pointed out that opportunity for rapid promotion and prospects of spectacular earnings will also compensate for comparatively low initial earnings.
Moreover, “compensation for a comparatively low wage may also be found in various amenities which attach to the job and enhance its attractiveness … which the worker enjoys. A man may prefer to seek employment in a poorly-paid job because the sacrifice in earnings is more than balanced by non-pecuniary amenities.”
A. Marshall pointed out that the attractiveness of a job is largely determined by its ‘net advantages’. Even if workers are all alike and there is labour mobility, competition will not equalise wages in all places and occupations. However, it is the net advantages of each place and occupation that tend to equality. However, there are certain obstacles to free mobility of labour which provide a second reason for differences in wages between places and occupations.
2. Barriers to Mobility:
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There are certain barriers to mobility. When an industry becomes overcrowded (like the printing industry), it is not possible for workers to transfer themselves immediately to other industries. Movement implies the scarifies of an acquired technique and a long trouble period of retraining and apprenticeship. The older the worker the greater the difficulty. In the words of A.C. Cairncross, “Immobility may result from the worker’s disinclination to move—a disinclination originating in ignorance, uncertainty, poverty, family ties, or sheer inertia.”
3. Unfair Wages:
Immobility accounts for disparity between the net advantages of different places and occupations. Labour of the same quality will be paid higher wages in one place than in another. Similarly, labour of the same calibre will enjoy better working conditions in one occupation than in another.
If labour is surplus in one occupation its marginal productivity will fall. The converse is true in another occupation where it is in short supply. Wages in the two occupations will differ. This divergence will continue until there is a movement of labour from the first occupation to the second.
‘Vertical’ Differences in Wages:
Vertical differences in wages and earnings refer to inequalities whose origin lies in differences among workers.
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There are three reasons for this:
1. Differences in Ability:
Thus, a more able worker can obtain higher wages than an average worker due to differences in natural ability. The best known lawyer (or the business consultant) in a city earns much more than the ordinary lawyer (or business consultant).
2. Differences in Training:
Differences in training also produce differences in earnings. A barrister, for example, has to spend many years, during which he earns little or nothing, preparing for the examination which he may never pass, and waiting for briefs which he may never be given.
3. Differences in Opportunity:
Inequality of earnings is also due to inequality of opportunity. The children of rich parents, for example, enjoy a more expensive education and a wider cultural background, have more freedom in their choice of occupation and better guidance in choosing it and have opportunity of making valuable social contacts. Thus, the son of a lawyer or architect starts with a fairly large advantage in income-earning power, and is generally able, given moderate ability, to keep ahead in the high-income group.