Labor Economics: Wages


Labor economics is apprehensive of establishing an understanding of the operations and the forces that impact the labor market. The labor markets operate via the dealings of the laborers and the employers in the market. Thus, labor economics is concerned with evaluating the actions of labor suppliers and those of the demanders of labor to understand the consequential pattern of wages, employment, and income (Menger, p. 46). Traditionally, labor is compared to the other factors of production such as land and capital.

Wages form the fundamental compensation for paid labor. The compensation for labor that is paid per period is called the wage rate. The United States workers are among the most highly paid workers in the world; however, the wage rate that is paid to the workers varies substantially. The basic pay offered to unskilled workers is maybe $8 per hour or less. On the other hand, skilled workers such as lawyers and physicians earn $150 per hour or more while dentists and some economists may earn $100 per hour (Gwartney, p.551). These analyses indicate a substantial variation in wages. Additionally, they raise some fundamental economic questions: How are the variations in wages explained? Why do American workers earn higher wages than other workers around the globe? What are the factors that underlie the variation in wages? This paper is concerned with explaining the factors that explain the variation in wages in the labor markets.

The earnings earned by individuals with an equal level of skills or within the same occupation vary substantially. Similarly; the earnings of members of the same family differ substantially. Additionally, earnings of persons with the same level of skills, intelligence, and the amount of training and experience differ substantially. These variations are explained by different factors that combine to determine the earning power of laborers. Some of the factors may be as a result of lack while others may result from well calculated decisions.

The labor market like all other markets is impacted on by the forces of demand and supply. In a perfectly competitive market, demand and supply forces interrelate to establish the prices of the factors of production. In the labor market; wages form the resource price and thus the demand and supply model can be used to explain the wage differential (Blundell and Thomas 42). The wage definition applied in this paper includes both wage earnings and the fringe benefits earned by employees. In addition to wage earnings, workers are entitled to fringe benefits such as medical insurance, paid leaves and pension benefits; similar to money wages these benefits vary substantially.

In a perfectly competitive market economy, the real wages earned by laborers would be equal if the following conditions are attained in the market: all individuals in the labor market were identical in terms of preferences, knowledge, and background; all the jobs offered in the labor market were equally attractive; and that workers were perfectly mobile within different job. Given that these conditions prevailed in the labor market, an increase in the wage rate in one market would result in expansion of workers in that market until the wage differential is eliminated (Blundell and Thomas, p. 42). However, this is just a notional market; in the real market wage differentials are a fact in the market. There are three factors that cause the wage differentials.

Wage differential because of dissimilar workers

Wage differential because of dissimilar workers is the main source of wage variation among different labor markets. Laborers vary in various aspects that impact on both the supply and demand for labor. Consequently, these factors impact on the wage rates. These variations are explained below:

Worker productivity and specialized skills

The demand for laborers who are highly productive is higher compared to the demand for laborers who are less productive. Employees who are able to perform their responsibilities more efficiently are more attractive to employers and attract higher wages. Compared to the less efficient workers, these workers contribute to a greater extent to the revenues of a company. In economic terms, the marginal revenue product of the more efficient workers is higher compared to the less efficient workers. In a perfectly competitive market, laborers are remunerated with a level of wages that corresponds to their marginal revenue product. Therefore, the labor services of the more productive laborers will demand higher wages compared to the less efficient workers (Bakrie and Octora 86). This results in wage variations.

Laborers’ productivity is impacted upon by various factors. These factors include native ability, training, hard work and an investment in human capital. The relationship between higher productivity and higher wages act to motivate people in human capital in order to upgrade the level of their skills. Furthermore, if investments in human capital do not lead to higher wages, there would be no incentive for investing in human capital including paying fees to attend college.

Worker preferences

Worker preferences form a significant source of wage differentials among workers; however, it is often overlooked. Life objectives vary between different persons; there are persons who are willing to earn a substantial amount of money. Others persons are willing to work in more than one job, work in long hours and invest heavily in human capital in order to earn additional income (Gwartney, p. 553). Thus, while some people may be workaholics, some may prefer to spend valuable time with their families since they are satisfied with the incomes they earn.

Though economics do not dictate that some preferences are superior to others, it indicates that variations in worker preferences in terms of money, work and skill enhancement contribute substantially to wage variations. Thus, ceteris paribus people who are highly motivated by money will undertake measures that will guarantee them higher wages; thus, promoting wage variations.

Race and gender

Discrimination on the basis of gender and race also contribute significantly to wage differentials. Employment discrimination greatly curtails earnings opportunities for women and the minority groups. Additionally, there are other discriminatory forms that promote wage differentials such as discrimination in accessibility of educational discrimination and discrimination in the access of specialized training (Bakrie and Octora, p. 86). These factors limit the access of minorities to human capital enhancement opportunities thus denying the minorities a chance to enhance their productivity and earn higher wages. Other factors that limit the chances of acquiring quality education also impact on skill advancement and education achievement and thus promote wage variation.

Wage differential because of dissimilar jobs

When laborers are looking for employment opportunities, they consider both the wage rates and the working conditions. Job opportunities that include no pecuniary job characteristics will lead to workers demanding for higher wages compared to wages demanded by workers working in less risky and demanding jobs (Gwartney, p. 552). The higher wages compensate workers for the no pecuniary work conditions. This form of wage differential is referred to as compensating wage differential.


In conclusion, wage differentials storm from various sources; these sources are categorized into three categories; variations in workers, variations in job opportunities, and immobility of factors of production. A substantial amount of these wage differentials play a significant allocation role that compensates people for their investment in human capital that raises their productivity and for working in unfavorable working conditions. Other forms of wage discriminations display worker preferences and personal preferences for monetary compensation compared to non-monetary compensation. These wage discriminations promote worker productivity since they are based on worker productivity and preferences. However, the wage discriminations that are based on discriminations curtail efficient production since they are not correlated to worker productivity and preferences.

Works Cited

  1. Bakrie, Anindya, and Octora Morendy. Schooling, Experience, and Earnings. New York, NY: Columbia University Press, 2002. Print.
  2. Blundell, Richard, and Thomas MaCurdy. Labour Supply: The New Palgrave Dictionary of Economics. 2nd ed. London: Macmillan, 2008. Print.
  3. Gwartney, James, Stroup, Richard, Sobel, Russell, and Macpherson David. Economics: Private & Public Choice. 11th ed. New York, NY: South-Western College Publishers.
  4. Menger, Carl. Principles of Economics. Alabama: Ludwig von Mises Institute, 2007. Print.
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