Question Tharaka Finance & Economics

Economics has difficulty in explaining why wage rates for individuals vary across occupations and industries and within occupations and industries. Discuss

Economics has difficulty in explaining why wage rates for individuals vary across occupations and industries and within occupations and industries. Discuss

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Answer Internal Staff

Due to the profound influence that wages have upon the living conditions of recipients they are a hotly contested issue and variations are scrutinised intensely.

Variations between different industries and occupations are explained through simple supply and demand mechanics. In order to produce goods a certain amount of labour is required, while the potential supply of labour is limited by the population of those who have the necessary skills to provide that specific labour. Interaction between levels of these two factors sets the price for labour at an equilibrium point. If there is a high demand for labour that requires a rare skill set, then that labour will have a high price, and thus generate higher wages. The overall wage rates within a given country are determined through the country’s GDP, and the productivity per worker.

For differences within industries and occupations the same rules as above still apply, so roles using scarce skills will need to offer higher wages, but other factors also take effect. Factors such as experience and performance can be considered to take place at this level, with higher wages offered as each increases – this is because of the positive correlation both have with productivity. Another factor is location, in a prosperous and high cost area (such as London) wages are generally higher for comparable work. This is because the wages offered need to cover the higher cost of living.

A potential (and controversial) factor is demographics of the worker (i.e gender, race, etc.). For example, the ‘wage gap’ between male and female employees has received much attention. However, objective information on this subject is uncommon as political points are often a feature of the discussion. In many cases a perceived gap may be explained through economic and business factors (such as experience and continuity within organisations).