Why do people earn different wages?
There are numerous reasons as to why different people earn different wages, ranging from educational qualifications to how attractive a person is. The following are a some determinants of equilibrium wages:
Compensating Differentials
Compensating Differential is an economists’ term used to explain
how wages might vary in order to compensate for the unappealing aspects of
certain jobs. When it comes to jobs that involve a certain level of skill or
risk, employers must offer higher wages in order to incentivize people to do less
appealing work. This explains why doctors who work long hours and must complete
many years of schooling earn more than waiters, or why employees who work after
a certain time at night earn more per hour than those who work during the day.
how wages might vary in order to compensate for the unappealing aspects of
certain jobs. When it comes to jobs that involve a certain level of skill or
risk, employers must offer higher wages in order to incentivize people to do less
appealing work. This explains why doctors who work long hours and must complete
many years of schooling earn more than waiters, or why employees who work after
a certain time at night earn more per hour than those who work during the day.
Education
According to the human capital view of education, being educated can improve your ability to work and therefore you will be more productive. This then allows you to earn more. However, an alternative theory, the signalling theory, suggests that firms use educational qualifications to determine how hard a potential employee will work. It does not presume that they will be more productive, but because people with degrees have spent longer in education, this signals to the employers that they have a higher ability to work well.
Ability, Effort and Chance
Based on statistics, it is easy to tell that on average a higher level of education
results in a higher wage. More difficult to quantify is the role that ability, effort
and chance play in determining how much a person earns. These factors are
undoubtedly important – one cannot become a doctor or a barrister without a certain
level of intelligence, drive, and good fortune – but these variables aren’t often looked
at by economists because they are difficult to measure. Nevertheless, even though
they are difficult to quantify their importance ought not to be discounted, as they still
play a part in determining why one person’s wage might be higher than another’s.
results in a higher wage. More difficult to quantify is the role that ability, effort
and chance play in determining how much a person earns. These factors are
undoubtedly important – one cannot become a doctor or a barrister without a certain
level of intelligence, drive, and good fortune – but these variables aren’t often looked
at by economists because they are difficult to measure. Nevertheless, even though
they are difficult to quantify their importance ought not to be discounted, as they still
play a part in determining why one person’s wage might be higher than another’s.
Discrimination
Another reason for differences in wages is discrimination. It can vary from marital status to your gender. Although huge efforts have been made to eliminate discrimination e.g. the introduction of the Employment Equality Act in Ireland, it is still a serious problem and needs to be resolved. According to the Equality Authority, allegations of wage discrimination were up 60% in 2010, this figure suggesting that major changes need to be made to make the workplace a fair and equitible place for everyone. There is still a gap between what males and females earn, however, it has improved significantly. In 1969 women were earning 47% of what men were, and while that figure rose to 86% by 2006, we can clearly see that there is still room for improvement!