What this lesson teaches
I can explain why wages differ between workers, including skill, sector, discrimination and public or private employment.
Syllabus K343, 3.3.3. Reasons for differences in wages: reasons for differences: demand for and supply of labour, relative bargaining strengths, discrimination, e.g. male/female, government policy; how these reasons influence the wages of workers, depending on: level of skills of workers, economic sector workers operate in: primary/secondary/tertiary, discrimination between workers, e.g. male/female, whether the worker is working in the private sector or public sector
Make a guess
Cleaning is hard physical work, yet cleaners earn less than accountants. Why?
- Accountants work harder than cleaners.
- Many can clean; few can do accounts.
- The government decides that accountants earn more.
Show the answer
Many can clean; few can do accounts.
Wages depend on demand and supply for each type of labour. A large supply of cleaners keeps their wage low, however hard the work.
Wages differ because of the demand for and supply of each kind of labour, bargaining strength, discrimination and government policy.
Demand and supply. A worker's wage is the price of their labour, so it is set like any price. Demand for a skill is high when the workers who have it produce a lot of value, as surgeons and software engineers do. Supply is low when the skill takes years of costly training. High demand and low supply give a high wage. When many people can do a job with little training, supply is large and the wage is low.
Bargaining strength. When workers bargain together through a trade union, an employer cannot easily replace them all, so they can win higher pay than each would alone. Workers with rare skills also bargain well, because the firm would struggle to find someone else. Workers with common skills, or who are afraid of losing their jobs, have weak bargaining power and accept lower pay.
Discrimination. An employer who pays a group less for the same work, for example women, older workers or one race, creates a wage gap that has nothing to do with productivity. The group affected earns less, and the economy wastes talent, because people are not paid or promoted according to what they can do. Many countries, Singapore included, have rules against it.
Government policy. A minimum wage lifts pay at the bottom. Rules on training, licensing or foreign workers change how many people can do a job, and so the wage. As the government is a large employer, its own pay scales also set wages for teachers, nurses and civil servants.
- Skill
- Scarce skills command higher wages.
- Sector
- Tertiary jobs often pay more than primary jobs.
- Other reasons
- Bargaining power, discrimination, government policy, public vs private sector.
- Progressive Wage Model
- Singapore sets minimum pay for some low-wage jobs, such as cleaners and security officers, rising with skills.
Worked example: Singapore's Progressive Wage Model
Singapore has no national minimum wage. Instead, its Progressive Wage Model sets minimum pay for some low-wage jobs, such as cleaners and security officers, and raises that pay as workers gain skills.
- Reason for the low wages: many people can do these jobs with little training, so supply is large and bargaining power is weak.
- Policy: firms in these sectors must pay at least the set wage for each job level, and the levels are reviewed over time with unions and employers.
- Effect: cleaners and security officers earn more, and training gives a path to higher pay.
- Who pays: firms' costs rise, so they may charge customers more, for example higher cleaning contract fees.
Watch out for this
Some jobs pay more because the workers work harder.
Effort alone does not set wages. Pay depends mainly on demand for and supply of each type of labour. Many hard jobs, such as cleaning, are low paid because supply is large.
Check your understanding
Why might a qualified accountant earn more than a farm labourer?
- Fewer people have accounting skills, so supply is low relative to demand.
- Accountants work longer hours, and their pay rises with the hours they work.
- Farms need fewer workers each year, so demand for farm labour keeps falling.
Show the answer
Fewer people have accounting skills, so supply is low relative to demand.
Right. Scarce skills command higher wages.
Check your understanding
Which change is most likely to raise the wage of plumbers?
- More people qualify as plumbers each year
- Fewer young people train as plumbers
- Fewer new homes and offices are built
- Cheap, easy-to-fit plumbing kits become popular
Show the answer
Fewer young people train as plumbers
Right. A fall in the supply of plumbers, with demand unchanged, raises their wage.