Wages differ because of demand and supply for different skills, bargaining power, discrimination and government policy.
Demand and supply: highly skilled workers, such as surgeons, are in high demand. They take years to train, so their supply is low and their wages are high. Unskilled workers are in larger supply, so wages are lower.
Bargaining strength: workers with strong unions, or skills that are hard to replace, can negotiate higher pay. Discrimination, for example paying women less than men for the same work, also creates differences, even though it is unfair and often illegal.
Government policy matters too, through minimum wages and public sector pay scales.
These reasons show up in patterns. Skilled workers earn more than unskilled. Tertiary sector jobs such as finance often pay more than primary sector jobs such as farming. Pay may differ between the public and private sectors, with private jobs often paying more but offering less security.
- Skill
- Scarce skills command higher wages.
- Sector
- Tertiary jobs often pay more than primary jobs.
- Other reasons
- Bargaining power, discrimination, government policy, public vs private sector.
Worked example: Explaining a pay gap
Why does a doctor earn more than a cleaner?
- Demand: doctors are highly productive and their services are vital, so demand is high.
- Supply: few people have the ability, time and money to complete medical training, so supply is low.
- Cleaners: many people can do the job with little training, so supply is high relative to demand.
- Result: the doctor's equilibrium wage is far higher.
Watch out for this
Some jobs pay more because the workers work harder.
Effort alone does not set wages. Pay depends mainly on demand for and supply of each type of labour. Many hard jobs, such as cleaning, are low paid because supply is large.
Check your understanding
Why might a qualified accountant earn more than a farm labourer?
- Fewer people have accounting skills, so supply is low relative to demand.
- Accountants work longer hours in every case.
- The primary sector has no demand for labour.