Wage differential


Wage differentials among workers working in the same unit, among different units, occupations, regions and the like are common features of labor markets in various countries. Inter-personal wage differentials are mainly due to variations in personal characteristics like sex, age, skill, knowledge etc of employees who work in the same unit and are in the same or similar occupations. Inter-firm or inter-unit wage differentials reflect relative wage levels of workers in different units in the same or similar occupation. These differentials are mostly because of varying abilities of the firms to pay wages. Inter-occupational wage differentials are due to varying requirements of physical skills, endurance, knowledge etc., varying demand and supply conditions and the like. Inter-area differentials are mainly due to varying demand and supply factors, living costs, abilities of employers to pay and the like.

Wage Differentials and Economy Functions:

Wage differentials perform important economic, functions like labor productivity, attracting the people to different jobs. Since most of the workers are mobile with a view to maximizing their earnings, wage differentials reflect in variations in productivity, efficiency of management, maximum utilization of human force etc. Attracting efficient workers, maximization of employee commitment, development of skills , knowledge, utilization of human resources, maximization of productivity can be fulfilled through wage differentials as the latter determines the direct allocation of manpower among different units, occupations and regions so that national production can be maximized. Thus wage differentials provide an incentive for better allocation of human force, labor mobility among different regions and the like.

Wage differentials play pivotal role in a planned economy in the regulation of wage and development of national wage policy by allocating the skilled human force on priority basis.

Development of new skills, knowledge etc., is an essential part of human resources development. Shortage of technical and skilled personnel is not only a problem for industries but it creates bottlenecks in the attainment of planned goals. Thus wage differentials, to certain extent, are desirable from the view point of national interest. As such, they probably become an essential part of national wage policy. Complete uniform national wage policy is impracticable and undesirable.

Are Wage Differentials Justified?

Wage differentials on the basis of occupations, units, and areas (when real wages are taken into account) can be justified on the basis of equal pay for equal work among workers. They are also justified in view of varying conditions of demand and supply and varied job requirements like skill, knowledge, aptitude, ability, experience etc. But the object of the Government is to minimize income inequalities and inequalities in the distribution of wealth. Thus, wage differentials are not desirable in a socialistic pattern of society. However, formulation uniform wage policy ignoring difference in individual skills, knowledge etc., units ability to pay , varying living costs in different regions, varying demand and supply conditions, differences in occupation etc. is practically not possible. Hence, a compromise between uniform wage policy and wage differential has to be developed in view of the principles of socialistic pattern of society.

Inter-personal, inter-unit, inter occupational wage differentials are more predominant in unorganized sector of Indian economy. But even in organized sector and public sector units, wage differentials are quite common. But the tendency appears to be towards minimization and regularization of personal wage differentials and to narrow down the gap between maximum and minimum wage in the same unit. Wage differentials on the basis of sex are however common mainly in unorganized sector of the economy.