NAME FLORA MUTANDIRI

REG. NUMBER W190057

PROGRAM HUMAN RESOURCES MANAGEMENT INTAKE 1O

COURSE LABOUR ECONOMICS

LECTURER DR .D.DAMIYANO

ASSINGMENT 2:

Justify wage differentials using job or employer heterogeneity models

Wage differential means that the wages paid to workers varies greatly. These wage differentials
are mostly the results of differences in worker ability and the workers effort in performing the
job there are also wage differentials across occupations because of difference in the demand and
supply of laborers for particular jobs. There is bound to be some inequality in the allocation of
reward among workers. Some workers will typically command much higher earnings than
others. Differences arise because of differences in the amount of education required.

Minimum wages have been defined as the minimum amount of remuneration that an employer is
required to pay wage earners for the work performed during a given period, which cannot be
reduced by collective agreement or an individual contract. The purpose of minimum wages is to
protect workers against unduly low pay. They help ensure a just and equitable share of the fruits
of progress to all, and a minimum living wage to all who are employed and in need of such
protection. Minimum wages can also be one element of a policy to overcome poverty and reduce
inequality, including those between men and women.

In occupational wage differentials certain occupations pay more than others. Engineers make
more money than teachers. Most of these wage differentials are the result of educational and
training requirements. Education and training limit the supply of labor in that they take a
minimum time to complete and require a certain level of skill. Differentiations based on
industry and organizations in industrial differentials also can be stated as occupational
differentials comes in existence due to the requirements of different competency level and
instability in demand and supply of manpower having such kind of competency or skills.
Compensation package usually determined on the basis of skills required to complete a
specific job. So highly specified jobs need higher degree of competency and pay higher for
this, and vice versa. Scarcity of labor supply also induces the higher wages and salaries.

M.W Reder (1955) states that, “Another primary factor that determines wages is the demand
for the worker, which is a derived demand for the product or service that the worker provides.
If the worker provides a product or service that is highly desirable, then a higher wage will
prevail for a given supply of workers who could do that job”.

Compensating wage differentials arise to compensate workers for nonwage characteristics of the
job, it consists of extra pay that an employer must provide a worker for some undesirable job. If
a job is unpleasant, the firm must probably offer a higher wage to attract workers. Workers have
different preferences and firms have different working conditions. The compensating wage
differential depends on how much income is necessary to compensate for unpleasant working
environment. For example, 2 jobs may have same skill requirement but one being a toilet
cleaner may require a higher wage to attract enough people to supply their labor for that job
compared with being a gardeners. Compensating wage differentials may also be necessary for
dangerous jobs which have got a risk of injury or death for example working at the mine. These
jobs pay higher wages. Another source of compensating wage differential is fringe benefits.
According to M. Douglas (1960), “fringe benefits are more than an increase in the pay check,
they are an important and permanent element of wage administration structure”. Jobs with
greater fringe benefits pay lower wages. Common examples of fringe benefits include medical
and dental insurance, use of a company car, housing allowance, educational assistance, vacation
pay, sick pay, meals and employee discounts.

Job location is another source, for any given type of job wages are usually higher in one locality
than in others. This is because of difference in the cost of living, cities with great amneties pay
lower and cities with greater cost of living pay higher wages. For example residents in Harare
have a high cost of living compared to people living in a small town like Kwekwe.

There are also wage differentials due to differing skill requirements, jobs that require more
education and training will pay a higher wage rate than those that do not for example a doctor is
paid more than a nurse. According to N.L.Maxwell (2008), he states that “jobs demanding
office/clerical skills, mechanical skills, or the new basic skills of reading math, problem solving
and communication paid higher wages, on average than did other low skill jobs, especially those
in which physical skills were relatively important”.

Performance based pay is a method of compensation that involves paying employees for the
work they do instead of paying with a salary or hourly wage. The purpose of performance pay is
to attract the most highly qualified and productive workers that is workers with highest marginal
revenue productivity. Performance pay is also used to motivate workers to work. Many
employees paid a flat wage rate are often not serious about their work which in turn lowers their
productivity. Employees who are not serious can also lower morale, since harder working
employees resent being paid the same as the not so serious employees. Small business owners
who don’t want to give employees permanent pay increases may be using performance-based
pay such as bonuses or profit-sharing arrangements to reward employees without putting too
much stress on their business finances.

Another wage differential is due to occupational licensing, for example if one relocates to South
Africa but with no permit to work there, they will be disadvantaged because they will get low
wage than those who have got permits.

Moving on to market imperfections as a source of wage differential There is a belief that people
will migrate to higher paying jobs from lower paying jobs of the same type and with the same
requirements. However, this can only happen if people know about the jobs. People tend to look
for jobs in their own locality by searching the local newspaper or local Internet listings.
Moreover, many people get jobs from their network of friends and acquaintances who tend to
live in the same area. Hence the lack of information can lead to persistent differences in wage
differentials for the same type of job. According to Torres, et all (2012), “A central feature of
perfectly competitive markets is that markets clear meaning that all workers with similar quality
should be paid the same market clearing wage. The assumption of a single market wage that
would cause all employees to leave instantaneously the firm after a one cent wage cut seems
unrealistic. Recent empirical evidence suggests the presence of considerable wage dispersion
among workers with similar characteristics and among similar firms. Torres”.

Other job or employer heterogeneities is the size of the firm, large firms pay higher wages than
smaller firms. Workers at large firms may be more productive because of trainings and better
workers. However, Abowd et all (1999) states that, “individual heterogeneity rather than firm
heterogeneity accounts for almost all the wage variation between detailed size categories”.

In Gender based differentials, generally the need of male and female employee depends upon the
nature of job, some of the jobs may need masculine role and some may need feminine role for its
effective performance. These circumstances helps to employ women and male employee as per
the job requirements but the difference in the capacity or ability to perform the job the wages
may vary accordingly, and it may create wage differentiation.
Implications of wage differentials include both macro and micro levels. At the macro level these
differential determine the allocation of human resources and nonhuman resources. These
allocations determines the growth pattern in the economic system. When a particular industry
offers higher wages the economic resources are geared to develop such personnel. At the micro
level wage differentials show that some organizations use proactive strategy to attack better
talents as compared to others.
REFERENCES

Abowd et al (1999): Jounal, American Economic Association

Monteath Douglas (1960): Website

Van.L.Maxwell (2008): Sage Publication.

Reder. M. W (1955): American Economic Association

Torres et all (2012): Labor Economics