Different workers get different pay. This reflects personal characteristics
such as education, job experience, sex, race and union status.
Skills are the most important source of wage differentials.
Human capital formation includes both formal schooling and
on-the-job training. Earnings profiles confirm that workers with more education
and training earn higher lifetime incomes.
How much more employers pay for skilled workers depends on the production
technology. The demand for skilled workers depends on the extent to which
skilled and unskilled workers can be substituted and on the output demand
for industries that use skilled workers relatively intensively.
Skilled labour is relatively scarce because it is costly to acquire human
capital. Education beyond minimum age has not only direct costs but the opportunity
cost of earnings forgone by not working immediately. The investment decision
for human capital involves comparing the present costs with the present
value of extra income or other benefits in the future.
These considerations are reinforced by the role of education as a screening
or signalling device, which indicates to employers the workers
of innate ability. Thus education has a return to highability workers even
if it does not directly increase their productivity.
Women and non-whites on average receive lower incomes than white men. Women
and nonwhites are concentrated in relatively unskilled jobs with fewer opportunities
for promotion. This need not reflect blatant sexism or racism by employers.
It may reflect educational or other disadvantages before young workers reach
the labour market. It may also reflect a low perceived rate of return by firms
on the money spent in training such workers or by such workers on the time
spent in education and skill acquisition.
Under a third of the UK labour force now belongs to a trade union.
Unions restrict the labour supply to firms or industries, thereby raising
wages but lowering employment. Unions move firms up their demand curve for
labour.
Unions achieve a higher wage differential for their members
the more inelastic the demand for labour and the more they are willing or
able to restrict the supply of labour. However, some union wage differentials
are compensating wage differentials, which unions have secured in return for
changes in work practices that raise productivity but reduce job satisfaction.
