Get the answer of: Why Do Wage Rates Vary?

Get the answer of: Why Do Wage Rates Vary?

We know that wage rates are not uniform. They differ between occupations or between localities for the same occupation. If wage rates differ between occupations, then we have ‘horizontal differences’ in wages. ‘Vertical differences’ in wages occur when wage rates vary between different persons within the same occupation.

We know that money wages are not uniform for all occupations. Money wages may be high in one occupation or low in another occupation. This kind of difference in money wages is known as horizontal differences in wages. If differences in wages are attributed to differences in ability or efficiency, then such differences are called vertical differences in wages.

Anyway, differences in wage rates are due to differences in the conditions of supply and demand. We know that great cricket players or football players or famous surgeons earn more. The supplies of these talents indeed are limited while the demand for these talents is great.

Consequently, they are paid severed crores of rupees a year for performing their jobs. This may be attributed to differences in ability. Economists call such differences ‘rent of ability’.

(a) Vertical Differences or Non- Equalizing Differences in Wages:

Wage differentials in most cases are of non- equalizing types. Some people may have superior natural ability in the form of superior talents, allowing them to earn more than others. In other words, qualitative differentials among workers lead to wage differentials. The higher income resulting from superior quality or ability is often referred to as rent of ability.

Sometimes, wages vary due to differences in training of pursuing a profession. A barrister, or a doctor or an information technologist earns more than, say, the bank manager, not because of their superior ability, but because of the better opportunities of training obtained and inelasticity in their supplies.

An expensive and arduous training a doctor student needs while pursuing his studies. To become an MBBS graduate, a student has to study for at least 7 to 8 years; while, a postgraduate degree certificate is obtained by an arts/commerce/science students after 5 years. Obviously, wages of these workers are expected to be lower than those of doctors or engineers or barristers.

(b) Horizontal Differences or Equalizing Differences in Wages:

There are some jobs which carry more power and prestige, better opportunities for promotion and prospects of handsome earnings, greater non-pecuniary advantages in the form of agreeableness or disagreeableness of occupations, more security but less strain and physical hazards, and so on.

Under their circumstances, wages may be lower in one occupation. Such wage differentials among workers alike in efficiency are called equalizing or horizontal differences in wages.

A worker may accept a low wage job if he finds that he wields power and prestige in conducting his job. If a job carries opportuni­ties for promotion and prospects of spectacular earnings in future, a low wage job may be accepted.

Sometimes police and railway employees enjoy subsidized ration, free travel in rail, free accommodation, cheaper medical care, etc., though their money wages are low compared to other workers where such facilities are not provided.

(c) Other Causes:

Wage rates vary when there is a presence of non-competing group of workers. We know that different categories of labour of different occupations always compete with one another. A doctor earns more than a butcher because these people are non-competing workers. Even after receiving a great deal of training, a college professor or a butcher can never earn like a doctor, and vice versa. Therefore, wage rates must vary.

Immobility (both geographical and occupational) seems to be another reason for differences in wages. There cannot be perfect geographical mobility of labour. In other words, there are some barriers for which labour cannot move from one place another. There are also occupational immobilities for which no two workers can switch over from one occupation to another.

Thus, immobilities result in division of labour markets into several smaller markets according to locality and occupation. What is important to note here is that differences in the wage rates between occupations or between localities for the same occupation are attributed to differences in the supply of workers rather than differences in demand.

In addition, there are social immobilities that cause differences in wages. Born in a superior caste, religion, etc., creates inequali­ties of job opportunities. Prejudice, bias, customs, etc., may also restrict the movement of workers.

All these create non-competing groups among workers of different occupa­tions and, hence, differences in wages. The excess income which a person earns by virtue of caste, religion or custom is called ‘institutional rent’.

Wage rate variation may also be explained in terms of time. In a short run situation, supply conditions of a particular group of workers remain fixed. We know that as population grows demand for health care rises. But if the numbers of medical institutions that impart training to would- be doctors remain more or less fixed in the short period, a doctor is supposed to earn more.

But if a long run view is taken, the supply of doctors will rise if more medical institutions are established. Thus, in the long run, a doctor may not earn enough wages if supply of doctors’ increase.

Thus, wage rates vary in different occupations as a result of vertical and horizontal differences in wages and as a result of immobilities of all kind (i.e., geographical, occupational and social).