Why do different workers receive different wages?
In the economy there are many labor markets, including different professions - market of carpenters, market of engineers, market of surgeons and many others. As well as the labor force - a certain number of people willing to sell their labor on these markets.
The market of every profession set its own wages - the price at which workers sell their labor to firms. What determines the price of labor?
In determining the wages of any market crucially important is the next fact. Markets of all professions are linked with each other, so people can easily move from market to market, changing their profession. Therefore, the set of labor markets in the economy appear as a unified system.
Supply and Demand
Workers choose the market where they sell their labor power. What reasons could guide them in the choice of a particular market? The answer is very clear: workers consider the benefits of presence in the market and barriers to entry into this market.
The benefits of working sales in a particular market are composed of the following two components.
Firstly, it is wages that workers receive for their labor, and that is their income. This income, which they can spend on the purchase of various goods. The more money the worker will earn, the more he will be able to purchase. Of course, in order to determine the "clean" operating income from wages it is necessary to subtract from this amount the costs, associated with the sale of labor (e.g. costs of work clothes, transportation fees to and from work, and so on).
Secondly, it is pleasure (or displeasure) from the process of labor for the worker. Some types of work can be enjoyable for the worker and, therefore, bring him the usefulness, not taking into account the amount of wages (e.g., work as a taster of cakes). Certain types of work may be unpleasant, and therefore will bring displeasure (e.g., labor of stoker).
According the fact, that workers seek for more advantageous forms to sale their resources, they try to choose a market in which a combination of wages and utility (monetary and non-monetary rewards) is the most optimal for them.
But in order to receive benefits from the sale of labor in any market, the worker needs to overcome barriers that may impede market entry.
In the broad meaning, barriers to entry mean the costs that the worker must carry out in order to enter the market as a seller.
This barrier can also be an education (in order to get any profession, you need to spend time and money on training). Barriers can also be natural abilities - even if an individual wants to become an artist, he wouldn’t succeed, if he doesn’t have a talent. In the latter times the costs to enter market have become infinite.
So how could the general equilibrium be achieved in this system of tightly connected to each other on the labor markets of different professions?
Let us consider the simplest situation in which the overall balance is established in all labor markets.
1. Assume that all labor markets are perfect. This means that there is a full awareness of buyers and sellers about the conditions of transactions (workers can choose the highest wages) and easiness of making deals.
2. Assume that no worker receives no pleasure (or displeasure) from any work. This means that workers do not care what kind of job to perform - the miner, the businessman or manager. All types of work carried out with equal ease (no heavy or light work). Thus, the only thing that the workers may look for is to obtain the maximum wage.
3. Assume that there are no barriers to the movement from one market to another market (which means, that any worker can without any cost change his profession).
Under these conditions, on all labor market of economy should be established a single wage.
If the markets set different wages, the workers who sell their labor at a lower wage markets, will leave these markets and move into the market with higher labor costs. As a result, in those markets which they have left, wages will rise, and in those markets, which they have entered, wages will fall. The period of this process will be as long as all workers will be distributed on the markets in a way that subsequently same wages will be set.
In this case, an infinite elasticity of supply (Fig. 1) will exist in the labor market of the same profession. This means that the supply curve will be horizontal - slight increase in wages will cause a huge influx of workers from other markets. And vice versa - a slight decrease in wages will cause a withdrawal of all workers, who sell their labor on this market, and their migration to the other markets.
For example, if all markets established a salary of 1000 dollars per month, while on the market of carpenters - wages are 999 dollars per month, so as a result, all the carpenters will at once quit their jobs and move to other professions’ markets. Conversely, if the market, for example, of managers, wages were unexpectedly increased to the level of 1100 dollars per month, workers from other markets will start to move to the market of managers, and, as a result, their salaries will fall to the level of 1000 dollars per month.
If some of the assumptions made above are not fulfilled, it will be unable to achieve the same level of wages in all the markets.
Simple types of work can be easily divided into the groups, that require not a huge amount of effort from the average worker - for example, the work of a janitor, caretaker or office worker. It is easier to enter such markets, these jobs require little or no training and do not bring significant pleasure (or displeasure).
Wages in these markets (even if it is equal to w0) can be taken as a kind of benchmark with which to compare the price of labor in other markets - for various reasons, these rates may be higher or lower than the price of the simple labor.
The first group of reasons is related to the fact that the work of many different professions have different pleasure (or displeasure) for humans.
The pleasure, received from labor, plays the role of an additional (non-cash) wages and, consequently, reduces the operating requirements for conventional (money) wages. However, pure examples of such influence will be hard to find, because "pleasant" jobs require training, which (as you will see later) increases wages. For example, the profession of a cook at the restaurant, whose job is extremely interesting, because he experiences tasting delicious dishes, cannot be an example of a low-wage due to the act, that the profession of chef requires a long-term learning and, consequently, a higher payment.
A much more important role in determining the salary plays a displeasure to many professions.
Some types of work are related to the high costs of physical energy - for example, work as a steelmaker, miner or a porter. Therefore, wages should be somewhat higher than the wages of ordinary worker, otherwise miners and steelworkers just will not want to spend extra effort. It will be easier for them to give up their profession and go into the position of a postmen.
Some types of work are related to the high costs of mental energy - for example, the dispatcher work, the director of a large factory or work as an artist. The salary of such workers should also be above the ordinary workers’ wages, otherwise members of this profession will not want to carry these costs, and will go to more simple and quiet works with the same wage. It is psychologically difficult to perform an unpleasant work - for example, to be a butcher or a cleaner of toilets.
Further, some types of work ca not be physically or psychologically difficult, but can be harmful to the health of workers. For example, work in the chemical industry, work as a diver, work in a polluted environment. All of these types of work will "cost" for the worker more than a simple work, and so he will agree to sell his labor power on this market only if the salary compensates these losses.
The supply curve for these kinds of work looks like, as shown in Fig.2 (w0 - simple conditional wages). Since each person displeasure of these types of labor has different meanings, all the people will agree to occupy, for example, the position of a diver, working at different values of wages. Therefore, the supply curve S has a positive slope, meaning that the wage increase causes more and more workers, who want to go into this profession. And the equilibrium wage w1 is greater than w0.
For example, if wages for simple labor is equal to 1000 dollars, then in order to bring the first employee in the sphere of diving, the offered wages should be 1500 dollars, in order to attract the second worker – 1800 dollars, to attract the third one- 2200 dollars, and so on.
Obviously, the level of wages in the market of the profession will depend on the demand for it. If demand, for example, for the position of diver will be high, then to attract a sufficient number of people willing to do this work will require a substantial salary in comparison with the situation, when you want to bring just one or two divers. The total salary will determine the salary of the last worker, who decided to enter this market. And workers who agree to sell their labor in the market at lower wages, will receive benefits at the same time.
Worker skill set differentiations
The second group of reasons is related to the presence of barriers to be faced by any worker, wishing to enter the market of a certain profession.
One of the main obstacles here is an education. Many types of work are complex and require pre-working training. For example, a doctor, pilot or engineer need to learn a few years before such time as they will be able to do their work and get paid. During the entire period of training they need to spend money on their content (the purchase of consumer goods) and pay for training, not receiving an immediate cash return. Of course, they will agree to these expenses only if their future wages completely compensate all their losses.
The supply curve of these kinds of work looks like the same as the supply curve of "displeasing" labor (see. Fig.2). With an increase in wages more and more people will decide to learn or relearn to the profession, and the volume of supply in the market will grow.
Another barrier may be a natural ability (talent)of human, that make him more productive than others, in some types of work. Such workers can receive higher wages because they can generate a higher return than any conventional employee. For example, a skilled embroiderer, which makes during a working day 2 times more work than others, may require 2 times higher wages.
Especially highly important is the availability of talent in a variety of creative work, which are associated with the production of cultural goods - in the visual arts, music, etc. The talent is expressed in the high elaboration, and in the production of high quality of a product This talent is a barrier that limits the entry into some kinds of the market of all the people who do not possess this talent. For example, there are a limited number of the opera singers, which cannot be increased. The supply curve of labor, therefore, is vertical, and the salary is determined entirely by demand, which imposes on the services of these professions by theaters or record companies (Fig. 3 is w1). But at the same time, their salary is less than the price of the simple labor w0, and when the opera singers leave the market, the supply curve will be cut off at the point (Stigler, 877).
Strictly speaking, most of the kinds of labor can combine not just one, but two or more circumstances which distinguish them from simple labor. For example, the work of the surgeon requires both education and the ability to withstand psychological stress during surgery. The work of the traffic police inspector is physically heavy (be on the road all day), severe psychologically (watch for traffic) and quite unhealthy (breathe poisoned exhaust air). These types of work should require correspondingly higher payment for the people, who agreed to implement them.
There are some other reasons that can lead to disbalance in the relation between the complexity of the work and its payment. This may be the psychological characteristics of the behavior of the workers.
For example, such character trait as a loyalty to the profession. An individual may responsibly decide, what kind of work to perform. He may have a favorite business, which he does not agree to donate on the slight increase in earnings. Only serious financial problems (lack of money for food, for example) may make him neglect the things he loves and, in order to make money, to enter another market.
Or another psychological feature - the inertia in changing behavior. Wages, for example, of waiters may descend significantly, but the workers of the restaurant do not want to quit their job, because they are used to it and they do not want to change their daily life.
The production capacity of the employee of any profession also vary, depending on his physical characteristics - such as age and gender. Young and inexperienced doctor will receive lower wages than the old and experienced physician. The man, who works as a loader, will receive a higher wage than a woman of the same profession.
In the real economy, all these circumstances (displeasure, barriers and so on) could occur in any case.
In addition, the labor market economy may have some imperfections -difficulty obtaining information, shortness of transactions, etc. These may be another reasons for the differences in wages in different professions (e.g., turners do not know, that millers earn higher wages) as well as among representatives of one profession (turners on one factory and do not know about the higher wages at another factory).
Stigler, George.The Economics of Minimum Wage Legislation. San Francisco: Jossey Bass, pp. 871-890.