Reasons for differences in wages: discrimination, e.g. male/female

Microeconomic Decision‑Makers: Workers

Objective

Explain why wages differ between workers and evaluate the role of discrimination (e.g., male vs. female) in creating these differences.

Key Concepts

• Wage: The monetary remuneration paid to a worker for a unit of labour (usually per hour, week or year).
• Human capital: Skills, knowledge and experience that increase a worker’s productivity.
• Discrimination: Unfair treatment of workers based on characteristics unrelated to productivity (gender, race, age, etc.).

Why Do Wages Differ?

1. Differences in productivity – More skilled or experienced workers can produce more output, attracting higher wages.
2. Supply and demand for labour – Sectors with a shortage of workers tend to pay higher wages.
3. Education and training – Higher qualifications usually command higher pay.
4. Geographical location – Urban areas often have higher wages than rural areas.
5. Institutional factors – Minimum wage laws, collective bargaining, and tax policies.
6. Discrimination – Wage differentials that cannot be explained by productivity or market forces.

Discrimination and the Gender Wage Gap

Discrimination occurs when employers, customers or co‑workers treat individuals differently because of gender, even though their productivity is similar. The gender wage gap is a common illustration.

Types of Gender Discrimination

• Statistical discrimination: Employers use gender as a proxy for unobservable characteristics (e.g., assuming women are more likely to take career breaks).
• Taste‑based discrimination: Employers or customers have a “taste” for hiring men over women, or vice‑versa, regardless of productivity.
• Occupational segregation: Women are concentrated in lower‑paid occupations (e.g., care work) while men dominate higher‑paid sectors (e.g., engineering).
• Unequal bargaining power: Women may have less power to negotiate higher wages or promotions.

Evidence of the Gender Wage Gap

Even after controlling for education, experience and occupation, a residual gap often remains, suggesting discrimination.

Simple Model of Wage Determination

Let \$Wi\$ be the wage of worker \$i\$, \$Pi\$ the productivity, and \$D_i\$ a discrimination coefficient (0 if no discrimination, \$>0\$ if discrimination lowers the wage). A basic equation can be written as:

\$Wi = \alpha + \beta Pi - \gamma D_i\$

where \$\beta > 0\$ and \$\gamma > 0\$. If \$Di\$ is higher for women, their wages will be lower even when \$Pi\$ is equal.

Consequences of Wage Discrimination

• Reduced labour‑force participation among affected groups.
• Inefficient allocation of resources – talent may be under‑utilised.
• Lower overall economic growth due to reduced aggregate demand.
• Social inequality and reduced standards of living for disadvantaged groups.

Policy Responses

1. Equal Pay Legislation: Laws requiring equal pay for equal work (e.g., the Equality Act).
2. Anti‑Discrimination Laws: Prohibit gender‑based hiring and promotion practices.
3. Minimum Wage Adjustments: Raising the floor can reduce low‑wage gaps.
4. Promotion of Female‑Friendly Workplaces: Flexible hours, parental leave, and affordable childcare.
5. Education & Training Programs: Encourage women to enter high‑pay, male‑dominated fields.

Suggested Diagram

Summary

Wage differences arise from a mix of productivity, market forces and institutional factors. Discrimination—particularly gender‑based—creates a wage gap that cannot be explained by productivity alone. Understanding the mechanisms and impacts of discrimination helps economists evaluate the effectiveness of policies aimed at achieving a more equitable labour market.