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

Micro‑economic Decision‑Makers: Workers

Learning Objective

Explain why wages differ between workers and evaluate the role of discrimination (e.g., male vs. female) in creating these differences. Also consider the factors that influence an individual’s choice of occupation, the mobility of labour and the division of labour.

3.3.1 Factors Influencing an Individual’s Choice of Occupation

When deciding which occupation to pursue, people weigh both wage‑related and non‑wage considerations. The Cambridge syllabus explicitly lists “age” and “culture” as non‑wage factors.

• Wage‑related factors

  • Level of pay (hourly, weekly, annual)
  • Over‑time, bonuses and commission possibilities
  • Potential for future pay rises (promotions, experience gains)

• Non‑wage factors

  • Working conditions (hours, safety, physical strain)
  • Job security and contract type (permanent, temporary, zero‑hours)
  • Career status, prestige and social standing
  • Opportunities for training, advancement and skill development
  • Personal interest, aptitude and passion for the work
  • Location, commuting requirements and willingness to relocate
  • Work‑life balance (flexible hours, parental leave, childcare)
  • Age – younger workers may prefer part‑time or entry‑level jobs; older workers may value stability or reduced hours.
  • Cultural influences – family expectations, social norms or community traditions can steer people toward or away from certain occupations.

3.3.2 Wage Determination

Labour‑Market Model (Demand & Supply)

The wage rate is set where the quantity of labour demanded by firms equals the quantity supplied by workers.

• Shift in labour demand – caused by changes in product demand, technology or input prices. A right‑hand shift raises both W and E; a left‑hand shift lowers them.
• Shift in labour supply – caused by population growth, education levels, immigration or changing attitudes towards work. A right‑hand shift lowers the equilibrium wage but raises employment; a left‑hand shift does the opposite.

National Minimum Wage (NMW)

• Government‑set legal floor on pay (falls under Fiscal policy in the syllabus).
• When the NMW is set above the market‑determined equilibrium wage, the diagram shows a horizontal price‑floor line above W*. This creates:

  • Higher pay for workers who retain their jobs.
  • Excess labour supply (unemployment) because firms demand less at the higher wage.

Trade Unions (Government‑intervention in the labour market)

• Collectively bargain for higher wages, better conditions and job security.
• Union activity can be represented by a new, higher negotiated wage W_U (often above the market wage). In the diagram this appears as a vertical shift of the effective labour‑demand curve to the left (higher marginal cost for firms).

3.3.3 Reasons for Differences in Wages

1. Differences in productivity – More skilled, experienced or educated workers produce more output and command higher pay.
2. Demand for and supply of specific labour – Occupations with a shortage of workers (high demand, low supply) pay more.
3. Education and training (human capital) – Formal qualifications and on‑the‑job training raise productivity.
4. Geographical location – Urban or high‑cost‑of‑living areas usually offer higher wages.
5. Institutional factors – Minimum‑wage legislation, collective bargaining, tax incentives and employment protection.
6. Relative bargaining strength – Workers or groups with stronger bargaining power (e.g., high union density, gender‑based negotiation ability) can secure higher wages.
7. Discrimination – Wage differentials that cannot be explained by productivity or market forces (e.g., male vs. female).

3.3.4 Mobility of Labour

Mobility determines how easily workers can move between jobs or locations, influencing wage differentials.

• Occupational mobility

  • Ability to switch occupations or acquire new skills.
  • Facilitated by education, on‑the‑job training, apprenticeships and professional qualifications.
  • Barriers: lack of credentials, licensing requirements, high retraining costs, or employer discrimination.

• Geographical mobility

  • Willingness and ability to relocate for work (e.g., moving from a rural area to a city).
  • Push factors: low local wages, unemployment, poor infrastructure.
  • Pull factors: higher wages, better job prospects, improved living standards.
  • Barriers: housing costs, family ties, immigration restrictions, cultural or language differences.

3.3.5 Division of Labour

Specialisation of tasks within a firm or an economy.

• Advantages

  • Higher productivity – workers become faster and more skilled at a narrow set of tasks.
  • Lower average cost per unit – economies of scale reduce production costs.

• Disadvantages

  • Monotony and reduced job satisfaction – repetitive tasks can lead to lower morale.
  • Vulnerability to disruption – if one specialised worker is absent, the whole production line can be halted.

Discrimination and the Gender Wage Gap

Discrimination occurs when workers are treated differently because of characteristics unrelated to productivity (e.g., gender, race, age). The gender wage gap is a common illustration.

Types of Gender Discrimination

• Statistical discrimination – Employers use gender as a proxy for unobservable traits (e.g., assuming women are more likely to take career breaks).
• Taste‑based discrimination – Employers or customers have a “preference” for hiring men over women (or vice‑versa) even when productivity is identical.
• 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, indicating discrimination.

Simple Algebraic Model of Wage Determination

Let W_i be the wage of worker i, P_i the productivity, and D_i a discrimination coefficient (0 = no discrimination, > 0 = discrimination that reduces pay). A basic formulation is:

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

• β > 0: higher productivity raises wages.
• γ > 0: a larger discrimination coefficient lowers wages.
• If women on average have a higher D, their wages will be lower even when P is equal.

Consequences of Wage Discrimination

• Reduced labour‑force participation among the discriminated group.
• Inefficient allocation of talent – skills are under‑utilised.
• Lower aggregate demand, potentially slowing economic growth.
• Widening social inequality and poorer standards of living for affected groups.

Policy Responses to Reduce Gender Wage Discrimination

1. Equal‑Pay legislation – Laws requiring “equal pay for equal work” (e.g., the Equality Act).
2. Anti‑discrimination laws – Prohibit gender‑based hiring, promotion and pay practices.
3. National Minimum Wage adjustments – Raising the floor can lift the lowest‑paid women.
4. Trade‑union support – Unions can negotiate gender‑fair pay structures and improve bargaining power.
5. Female‑friendly workplace policies – Flexible hours, parental leave, affordable childcare, return‑to‑work programmes.
6. Education & training initiatives – Encourage women to enter high‑pay, traditionally male‑dominated fields (STEM, engineering, finance).

Suggested Revision Diagrams

• Labour‑market diagram showing demand (D_L) and supply (S_L), equilibrium (W*, E*), and the effect of a minimum‑wage floor.
• Diagram illustrating a higher union‑negotiated wage (W_U) and the resulting change in employment.
• Line graph of the gender‑wage‑gap percentage from 1990 to 2025, with markers for major policy interventions (e.g., equal‑pay act, NMW rises).

Summary

Wage differences arise from a mixture of productivity differences, market forces (labour‑demand and supply), institutional influences (minimum wage, trade unions), relative bargaining strength and discrimination. Gender‑based discrimination creates a wage gap that cannot be explained by productivity alone. Understanding these mechanisms, together with labour‑mobility and the division of labour, equips economists to assess the likely impact of policies aimed at a fairer, more efficient labour market.