Wage Differentials and Division of Labour

WAGE DIFFERENTIALS
Why do different jobs have different wages?

 Different abilities and qualifications (skilled v/s unskilled workers):
When the job requires more skills and qualifications, the lower and more inelastic the supply of
labour to such jobs. In addition, if the demand for such skills is high and the opportunity cost of
not using the services of such workers is high, demand for labour will be high and inelastic. The
combined effect of low and inelastic supply of and high and inelastic demand for labour will result
in a higher wage rate.
 Labour immobility:
The ease with which workers can move between different occupations and areas of an economy is
called labour mobility. If labour mobility is high, workers can move to jobs with a higher pay.
Labour immobility causes people to work at a low wage rate because they don’t have the skills or
opportunities to move to jobs with a higher wage.
 Risk involved in the job:
Risky jobs such as rescue operation teams will gain a higher wage rate for the risks they undertake.
 Unsociable hours:
Jobs that require night shifts and work at other unsociable hours are paid more.
 Lack of information about other jobs and wages:
Sometimes people work for less wage rates simply because they do not know about other jobs with
higher wage rates.
 Fringe benefits:
Jobs which offer a lot of fringe benefits have low wages. But sometimes the highest-paid jobs are
also given a lot of fringe benefits, to attract skilled labour.
Why do wages differ between people doing the same job?

 Regional differences in labour demand and supply:
If the demand in an area for accountants is very high, the wage rate for accountants will be high;
whereas, in an area of low demand for accountants, the wage rate for accountants will be low.
Similarly, a high supply of accountants will cause their wages to be low, while a low supply
(scarcity) of accountants will cause their wages to be high. It’s the law of demand and supply!
 Fringe benefits:
Some firms which pay a lot of fringe benefits, will pay less wages, while firms (in the same
industry) which pay lesser fringe benefits will have higher wages.
 Discrimination:
Workers doing the same work may be discriminated by gender, race, religion or age.
 Length of service:
Some firms provide extra pay for workers who have worked in the firm for a long time, while other
firms may not.
 Local pay agreements:
Some trade unions may agree a national wage rate for all their members – therefore all their
members (labourers) will get a higher wage rate than those who do the same job but are not in the
trade union. This depends on the relative bargaining power of the trade union.
 Government labour policies:
Wages will be fairer in an economy where the government has set a minimum wage policy. The
government’s corporate tax policies can also influence the amount of wage firms will be willing
to pay out.
Other wage differentials:

 Public-private sector pay gap:
Public sector jobs usually have a high wage rate. But sometimes public sector wages are lower
than that of the private sector’s because low wages can be compensated by the public sector’s high
job security and pension prospects.
 Economic sector:
Workers in primary activities such as agriculture receive very low wages in comparison to those
in the other sectors because the value of output they produce is lower. Further still, workers in the
manufacturing sector may earn lesser than those in the services sector. But it comes down to the
nature of the job itself. A computer engineer in the manufacturing sector does earn more than a
waiter at a restaurant after all.
 International wage differentials: d

Developed countries usually have high wage rates due to high incomes, large supply of skilled
workers, high demand for goods and services etc; while in a less-developed economy, wage rates
will be low due to a large supply unskilled labour.
Division of Labour/Specialisation
Division of labour is the concept of dividing the production process into different stages enabling
workers to specialise in specific tasks. This will help increase efficiency and productivity. Division
of labour is widely used in modern economies.
Advantages to workers:
 Become skilled: workers can get skilled and experienced in a specific task which will help their
future job prospects
 Better future job prospects: because of the skill and training they acquire, workers will, in the
future, be able to get better jobs in the same field.
 Saves time and expenses in training
Disadvantages to workers:
 Monotony: doing the same task repetitively might make it boring and lower worker’s morale.
 Margin for errors increases: as the job gets repetitive, there also arises a chance for mistakes.
 Alienation: since they’re confined to just the task they’re doing, workers will feel socially
alienated from each other.
 Lower mobility of labour: division of labour can also cause a reduced mobility of labour. Since
a worker is only specialised in doing one specific task(s), it will be difficult for him/her to do a
different job.
 Increased chance of unemployment: when division of labour is introduced, many excess workers
will have to be laid off. Additionally, if one loses the job, it will be harder for him/her to find other
jobs that require the same specialisation.
Advantages to firms:
 Increased productivity:
Since workers are selected to do tasks best suited for them, division of labour will help firms to
choose the best set of workers for their operations. When people specialise in tasks they are best
suited for, their output as well as the quality of the final output will be high.
 Lower costs:
Workers only need to be trained in the tasks they specialise in and not the entire process; and tools
and equipment required for a task will only be needed for a few workers who specialise in the task,
and not for everybody else.
 Streamlined and Faster Production process:
When everyone focuses on a particular task and there is no need for workers to shift from one task
to another. There will be an efficient movement of goods: raw materials and half-finished goods
will easily move around the firm from one task to the next. The production process will be smooth
and clearly defined, and so the firm can easily adapt to a mass production scale. As such, the
production process will speed up.
 Increased profits:
Lower costs and increased productivity will help boost profits.
Disadvantages o firms:
 Increased dependency:
The production may come to a halt if one or more workers doing a specific task is absent. The
production is dependent on all workers being present to do their jobs.
 Danger of overproduction:
As division of labour facilitates mass production, the supply of the product may exceed its demand,
and cause a problem of excess stocks of finished goods. Firms need to ensure that they’re not
producing too much if there is not enough demand for the product in the first place.
Advantages to the economy:
 Better utilisation of human resources in the economy as workers do the job they’re best at,
helping the economy achieve its maximum output.
 Establishment of efficient firms and industries, as the higher profits from division of labour will
attract entrepreneurs to invest and produce.
 Technological progress: as workers become skilled in particular areas, they can innovate and
invent new methods and products in that field.
Disadvantages to the economy:

 Labour immobility: occupational immobility may arise because workers can only specialise in a
specific field.
 Reduces the creative instinct of the labour force in the long-run as they are only able to do a
single task repetitively and the previous skills they acquired die out.
 Creates a factory culture, which brings with it the evils of exploitation, poor working conditions,
and forced monotony.

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WAGE DIFFERENTIALS

Why do different jobs have different wages?

Why do wages differ between people doing the same job?

Other wage differentials:

 International wage differentials: d

Disadvantages to the economy:

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