Wage Differentials

The five causes of wage differentials are as follows: 1. Occupational Differences 2. Inter-firm
Differentials 3. Regional Differences 4. Inter-Industry Differences 5. Personal Wage Differences.
As there are individual differences, so are wage differentials also. An organisation offers
different jobs, thus, differentials in wages for different jobs are inevitable. Wage differentials are
also known as inter-industry, inter-firm, inter-area or geographical differentials.
Wage differentials may be due to following causes:
1. Occupational Differences:
Occupations in an organisation widely differ from one another in terms of skill requirement and
the extent of requirement and the extent of responsibility. Accordingly, wages vary from
occupation to occupation. Such differences in occupations induce people/workers to undertake
more challenging jobs, encourage workers to develop their skills by way of education and
training. It is varying skill requirement for different occupation that shapes the manpower
planning in an organisation-be it an industrial organisation or educational institution.
2. Inter-firm Differentials:
There are wage differentials of workers in different plants in the same area and occupation.
Factors like differences in quality of labour employed by different firms, imperfections in the
labour market and differences in the efficiency of equipments and supervision result in interfirm wage differentials. Added to these are differences in technological advance, managerial
efficiency, financial capability, firms age and size, availability of raw material, power and
transport facilities also account for differences in wages among firms.
3. Regional Differences:
Not only wages differ among occupations, but these also differ in case of workers working in the
same occupation at different geographical regions. These differences are the result of working
conditions prevalent in different regions of the country For example; the Central Government

employees serving in the remote and disturbed areas like the North Eastern States of India are
paid additional remuneration in the form of the Remote Area Allowance. Sometimes, such wage
differentials are used to attract people to serve in particular regions.
4. Inter-Industry Differences:
These differences in wages surface in case of workers working in the same occupation and the
same area but in different industries. These differences are the result of varying skill
requirements, level of unionisation, nature of product market, ability to pay, the stage of
development of an industry, etc.
5. Personal Wage Differences:
These differences arise because of the differences in the personal characteristics (age or sex) of
workers working in the same unit and occupation. Though provision of equal pay for equal
work is certainly there, but it is still not the reality. Instances are there when woman worker is
paid less than her male counterpart for doing the same job. Of course, there are other reasons
also which cause wage differentials between male and female workers.
After all, what is the rationale behind wage differentials? There are two views about it. One, in
view of the principles of socialistic pattern of society in which the object of the representative.
Government is to minimise inequalities, in incomes and distribution of wealth.
Two, wage differentials are justified given the wide differences in demand and supply of jobs
along with wide variations in job requirements like skill, ability, aptitude, knowledge, experience
and so on. That wage differentials full exploitation of the national resources is yet another
justification given in support of wage differentials.

A trade-off (or tradeoff) is a situation that involves losing one quality or aspect of something in
return for gaining another quality or aspect. More colloquially, if one thing increases, some other
thing must decrease. Tradeoffs can occur for many reasons, including simple physics (into a
given amount of space, you can fit many small objects or fewer large objects). The idea of a
tradeoff often implies a decision to be made with full comprehension of both the upside and
downside of a particular choice, such as when a person decides whether to invest in stocks (more
risky but with a greater potential return) versus bonds (generally safer, but lower potential
returns).
The term is also used widely in an evolutionary context, in which case natural
selection and sexual selection act as the ultimate "decision-makers".[1] In biology, the concepts of
tradeoffs and constraints are often closely related.[2] In economics, a trade-off is commonly
expressed as opportunity cost which is the preferred alternative when taking an economic
decision.[3]

Examples from common life

The concept of a tradeoff is often used to describe situations in everyday life. [4][5] The old saying "do
not put all of your eggs into one basket" implies a tradeoff with respect to spreading risk, as when
buys a mutual fund composed of many stocks rather than only one or a few stocks. Similarly, trash
cans can be small or large. A large trash can does not need to be put out for pickup so often, but it
may become so heavy when full that one risks injury when trying to move it.
In cold climates, mittens serve well to keep the hands warm, but they do not allow the hands to
function as well as do gloves. In a like fashion, warm coats are often bulky and hence difficult to
store or even to hang up.
When copying music from compact disks to a computer, lossy compression formats, such as MP3,
are used routinely to save harddisk space, but information is thrown away to the detriment of sound
quality. Lossless compression schemes, such as FLAC or ALAC are a compromise solution.
Large cars can carry many people, but they also tend to be heavy (and often not very aerodynamic)
and hence have relatively poor fuel economy.
In the Olympics, the best sprinters are not the same individuals as the best marathoners, a tradeoff
based on various morphological, physiological (e.g., variation inmuscle fiber type), and
possibly motivational factors.

Tradeoffs in economics

In economics the term is expressed as opportunity cost, referring to the most preferred alternative
given up. A tradeoff, then, involves a sacrifice that must be made to obtain a certain product,
service or experience, rather than others that could be made or obtained using the same required
resources. For a person going to a basketball game, their opportunity cost is the money and time
expended, as compared with the alternative of watching a particular television program at home.
Many factors affect the tradeoff environment within a particular country, including availability of
raw materials, a skilled labor force, machinery for producing a product, technology and capital,
market rate to produce that product on reasonable time scale, and so forth.

Trade off & Work Leissure

Definition of Leisure

Labor economists think of leisure in a different way that most people do. For most people leisure
is
reading a book on a beach, watching TV, visiting friends and countless other things. The way
economists
think of leisure (and the way you should think of leisure to score points on tests) is as any time
that is not
spent working at a paid job. So we will actually consider taking a shower, watching your kids,
doing
aerobics as leisure, and (scoff) washing the dishes as leisure.

Using this definition, and because there are 24 hours in a day, all 24 hours are spent on labor or
leisure. If
you spend 8 hours a day working, you have 16 hours on leisure. If you work 2 hours a day, you
consume
22 hours of leisure. Letting W stand for hours of work, and letting L stand for hours on leisure,
we can
write:
24 = L+W

This will come in handy later.

Supply of Labor Big Picture

We will spend quite a while working on the supply of labor. Broadly, we are trying to figure out
what are the determinants of an individuals choice of where to work, how much to work, or
even if they wish to
work.
We will be interested in a number of questions, but for now we will be focusing on the how
much part.
Why do some people choose to work, while other people chose not to work at all? Why do some
people work overtime or work two jobs, while others work only part-time? Why do some people
choose to retire early? Why might you be working only 20 hours a week now, but plan on
working 40 hours a week next year?

The basic idea here to explore here is how much of their limited time to people want to spend on
leisure, and how much on labor. This is sometimes called the labor / leisure tradeoff. People
enjoy leisure, but
they also enjoy consuming goods. Goods require income and labor provides a means to earn
income.
Thus, another way to look at this tradeoff between labor and leisure is a tradeoff between leisure
and goods or between leisure and income.

Once we have the basics of the labor / leisure trade off under control, we can look at some other
factors, but we will first turn our attention to this labor / leisure tradeoff.

Labor / Leisure Tradeoff Big Picture

In thinking about this tradeoff, we will look at two different sets on information.

The first will be peoples preferences between leisure and labor. Of course, everyone likes
leisure, but everyone likes consuming goods as well. People will differ in their willingness to
trade leisure for income.
Some people are workaholics. Other people are leisure lovers. Moreover, their willingness to
trade leisure for income might depend on how much of each good they already have. For
example, you might be
willing to give from 0 to 2 hours of work a day for $20 a day, but I doubt you would be willing to
go from 22 hours of work a day to 24 hours of work today for $20. Your textbook calls this
subjective information.
The analytical tool we will use to capture preferences is called an indifference curve.
The second set of information will be peoples constraints. We all start with 24 hours a day.
However,
the rate at which leisure is exchanged for income (the wage rate) will differ amongst people.
Thus, the combinations of leisure and income that are attainable will differ amongst people. If
you get a raise, or have other sources of income, this may alter your choice. Your textbook calls
this objective information.
The analytical tool we will use to capture constraints is called a budget line (budget constraint).