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Workers » Why Wages Differ

What you'll learn this session

Study time: 30 minutes

Cambridge spec: 3.3.3

Four reasons why workers in different jobs are paid different wages
How skills, the economic sector, discrimination and public or private employment affect pay
Why a surgeon earns far more than a cleaner
How to explain a wage difference using demand and supply

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Why are some jobs paid so much more than others?

A surgeon may earn ten times as much as a cleaner. Both work hard and both are useful, so why is the pay so different? Economics gives four main reasons.

Key terms:

Skilled worker: a worker with qualifications, training or experience that take a long time to gain.
Unskilled worker: a worker who needs little or no training to do the job.
Discrimination: treating workers differently, for example paying them differently, because of who they are and not because of how well they work.

The four reasons for differences in wages

📈 Demand for and supply of labour

Where many firms want a type of worker (high demand) but few people can do the job (low supply), the wage is pushed up. Where few firms want a type of worker and many people can do the job, the wage is pushed down.

🤝 Relative bargaining strengths

Some workers are in a much stronger position than their employer when pay is negotiated. A strong union or a rare skill gives workers more power to win higher wages. Workers with little bargaining power have to accept what is offered.

🚫 Discrimination

Some workers are paid less than others doing the same job because of their gender or another personal feature. This is unfair and in many countries it is against the law, but it can still happen.

🏛 Government policy

Governments can change wages directly or indirectly. They set the national minimum wage, they set the pay of public sector workers, and they pass laws against discrimination.

You met the labour market diagram and trade unions in earlier lessons. Here we use them to explain why wages are different from job to job.

How the reasons affect different workers

1. Level of skills

Skilled workers usually earn more than unskilled workers, and two things push in the same direction.

Supply is low. Few people have the training. Becoming a surgeon takes many years of study, so few can do it.
Demand is high. Skilled workers are more productive, so firms are willing to pay more for them.

In the labour market diagram for surgeons, the supply curve is far to the left and the demand curve is far to the right, so the equilibrium wage is high. Cleaners are the opposite. Almost anyone can learn the job quickly, so supply is high. This keeps the equilibrium wage low. Unskilled workers also have little bargaining power because they are easy to replace.

2. Economic sector

Wages can also depend on the sector a worker is in. Primary sector workers get raw materials (farming, mining). Secondary sector workers make things (factories, building). Tertiary sector workers provide services (banking, teaching, shops).

Where primary sector jobs need few skills and many people can do them, supply is high and wages tend to be low.
Where secondary sector workers have skills that raise productivity, or where unions are strong, wages tend to be higher.
The tertiary sector includes both extremes. A bank manager or a lawyer can earn a high wage, while a shop assistant or a cleaner earns a low one.

The sector itself does not decide the wage. The skills needed and the demand and supply for those skills do.

3. Discrimination between workers

If an employer pays women less than men for the same job and the same output, that is discrimination. Workers who are discriminated against earn less. This lowers their wage even though their skills and productivity are the same. Government policy, such as laws that require equal pay for equal work, tries to reduce this gap.

4. Private sector or public sector

Private sector wages follow the market more closely. If a firm makes high profits and the workers are scarce, it can pay a lot. If it is struggling, it may cut wages.
Public sector wages are set by the government and paid out of tax revenue, so they depend on the government's budget and policy. Depending on the government's budget, some public sector jobs may pay less, and some more, than similar jobs in the private sector.

Worked comparison: surgeon and cleaner

Reason	Surgeon	Cleaner
Demand and supply	High demand, very low supply	Moderate demand, very high supply
Skills	Long, expensive training	Little training needed
Bargaining strength	Strong, hard to replace	Weak, easy to replace
Result	High wage	Low wage

Common mistakes

Do not say a surgeon earns more "because the job is more important". Cleaning is also important. Economics explains wages by demand, supply, skills and bargaining power. Another mistake is to say all private sector workers earn more than public sector workers. This is not always true, so give a reason for each case.

Exam-style question

In the made-up country of Kovaria, a hospital pays its surgeons $9,000 a month and its cleaners $1,200 a month. A man and a woman doing the same job in a Kovarian factory, with the same skills and output, are paid different wages, and the woman earns less.

(a) Identify two reasons why surgeons earn more than cleaners. [2 marks]

(b) Explain why the woman may be paid less than the man. [2 marks]

(c) Analyse how the demand for and supply of labour cause the difference between the wages of surgeons and cleaners. [4 marks]

Model answer

(a) Surgeons are highly skilled and few people can do the job (1). Surgeons have stronger bargaining power because they are hard to replace (1).

(b) This may be discrimination because of her gender (1). Her skills and output are the same as the man's, so the lower pay is not due to her productivity (1).

(c) Few people have the long training needed to become a surgeon, so supply is low (1). Hospitals need surgeons and are willing to pay a lot for their skills, so demand is high (1). Low supply and high demand push the equilibrium wage up (1). For cleaners, many people can do the job so supply is high, which keeps the wage low (1).

Exam tip

In an "Analyse" question, write a chain: say what is different (supply is low), then what that does (wage is pushed up), then name the worker it applies to.

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