Importance of Wage Differentials

Wage differentials have a great economic and social significance, for they are directly related to the allocation of the economic resources of a country, including manpower, growth of the national income, and the pace of economic development.

Social welfare activity depends, in a large measure, on such wage differentials as will:

(a) Cause labour to be allocated among different occupations, industries and geographical areas in the economy in such a manner as to maximise the national product;

(b) Enable full employment of the resources of the economy to be attained; and

(c) Facilitate the most desirable rate of economic progress.

Wage differentials reflect difference in the physical and mental abilities of workers, differences in productivity, in the efficiency of management and in consumer preferences, and act as signposts for labour mobility. By providing an important incentive for labour mobility, they bring about a re­allocation of the labour force under changing circumstances.

Under competitive conditions, wages are determined by conditions of demand (which reflect the productivity of workers) and conditions of supply (which reflect the attractiveness of jobs). The level of wages would depend upon the relative scarcity of supply in relation to demand. Scarcity differentials (which may be due to specific skills and mental abilities) produce wage differentials; and as long as the former as inevitable, the latter, too, would be so.

In other words, wage differentials reflect the different degrees of scarcity of the different categories of labour; and since different categories cannot be reduced to the same degree of scarcity in the market, wage differentials are inevitable.

Wage differentials arise because of the following factors:

(a) Differences in the efficiency of the labour, which may be due to inborn quality, education, and conditions under which work may be done.

(b) The existence of non-competing groups due to difficulties in the way of the mobility of labour from low paid to high paid employments.

(c) Differences in the agreeableness or social esteem of employment.

(d) Differences in the nature of employment and occupations.

The nature and the extent of wage differentials are conditioned by a set of factors such as the conditions prevailing in the market, the extent of unionisation and the relative bargaining power of the employers and workers, the rate of growth in productivity, the extent of authoritarian regulations and the centralisation of decision-making, customs and traditions, the general economic, industrial and social conditions in a country, and a host of other subjective and objective factors operating at various levels.

The prevailing rates of wages, the capacity of an industry to pay, the needs of an industry in a developing economy, and the requirements of social justice also directly or indirectly affect wage differentials.