Factors Affecting Wage Differentials

Instructor: LeRon Haire
Learn about major causes of differentials in wage rates, which include - but are not limited to - human capital, working conditions, discrimination, and government actions.

Reasons for Wage Differentials

In today's economy, one of the most pressing issues that corporations face is the differentials in the rate of wages. Have you ever stopped to wonder what causes the rates of wages to differ in the workforce? Let's take a closer look at four of the most prominent reasons behind variance in wage rates, including human capital, working conditions, discrimination, and government actions.

Wage Rates and Human Capital

As an employee, every individual would like to be paid fairly according to their typical industry rates. Unfortunately, this is often not the case, and one of the reasons that wage rates differ is human capital. Human capital can be defined as the collection of knowledge, skills, abilities, and experiences that are found in a population or an individual person, and that provide a value to them. The term human capital is often used when people are attempting to describe just how valuable a person or population is to an organization.

The relationship between wage rates and human capital is based on a relationship between the income or revenue that each employee brings into an organization and his or her wages. The concept of human capital also helps to explain the idea of supply and demand with respect to wage rates. Let's take a look at a supply and demand curve.

Supply and Demand graph

When a market has skilled workers (which is directly related to human capital), the demand for those workers increases because they are difficult to replace. The end result is higher wages for these employees as compared to unskilled workers, who are easier to replace and thus command lower wages.

Wage Rates and Working Conditions

The rate of wages in the workforce will also experience changes due to working conditions in the workplace. Typically, in these scenarios the more dangerous or unsafe the work environment, the higher the pay. This is also known as hazard pay. Any job or work duties that have a higher potential to cause distress or possible injury are subjected to higher wages than found in safer work environments.

For example, imagine that you are an employee in a manufacturing plant and your duties include transporting wood on planks that are located some 200-300 feet above the ground. Due to the fact that you are working 200-300 feet above the ground, this poses a significant threat for severe injury or worse. In these situations, your wage rates will be higher to compensate you for the risks inherent in your working conditions. Some examples of these types of jobs include the following:

  • working with or near hazardous chemicals
  • working with dangerous animals (i.e. lion trainer)
  • working with dangerous tools such as welders or blow torches

Wage Rates and Discrimination

Another factor that affects differentials in wage rates is discrimination. As many of you may already know, discrimination is the prejudicial treatment of an individual or group of people based upon characteristics like race, ethnicity, sex, gender, or age. Although often not spoken about, discrimination also occurs in the workplace, which can cause changes in the rate of wages among employees.

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