Wage Differentials (Cambridge (CIE) IGCSE Economics): Revision Note

What causes differences in wage levels?

• Wage levels vary significantly across occupations, industries, and even between workers doing similar jobs

• These differences arise from a combination of market forces, institutional factors, and social influences

• In competitive labour markets, wages are largely determined by the interaction between the demand for labour and the supply of labour

• However, other factors such as bargaining power, government policy, and discrimination can also play a decisive role

• The impact of these influences often depends on the worker’s skill level, the sector in which they operate (primary, secondary, or tertiary), and whether they work in the private or public sector

Explaining wage differentials

1. High demand + low supply → higher wages

• For example, specialist surgeons or talented basketball players have scarce skills, pushing wages up

2. Wage differentials between skilled and unskilled workers

• Many economies have a high supply of unskilled labour

  • This means that employers can push wages down, as there is always someone willing to work for less (take-it-or-leave-it approach to wages)

• To become skilled takes time and money, which means that there is a more limited supply of specific skill sets

  • In recognition of these factors, wages for skilled workers are higher

3. Wage differentials in the primary, secondary and tertiary sectors

• Primary sector workers are usually paid low wages due to the unskilled nature of the job and the fact that raw materials often generate the lowest profits in the production chain

• Secondary sector workers add value to the raw materials, and these products sell for higher profits. Therefore wages tend to be higher than primary sector wages

• Tertiary sector workers are paid the highest. Their jobs often require highly valued skills that take years to acquire and the products they sell or services they provide can be complex and expensive, e.g., artificial intelligence coders

4. Wage differentials between private and public sector workers

• Public sector organisations are owned and controlled by the government 

• Private sector organisations are owned and controlled by private individuals and firms

Differences between private and public sector pay

5. Wage differentials due to relative bargaining strengths

• Trade unions: Strong unions can negotiate higher pay and better conditions

  • For example, skilled workers in strong unions end up with higher wages (such as pilots)

• Employer power: In industries with few alternative employers, firms may keep wages lower

• Public sector: Often has collective bargaining and trade union representation, but wage growth may be limited by government budgets

• Private sector: There is more scope for negotiation if worker skills are in high demand by the firms

6. Wage differentials due to discrimination

• Workers may be paid differently due to gender, ethnicity, disability or other biases, regardless of skill or productivity

• This results in wage gaps between groups with similar qualifications and experience

Gender pay gap

• The gender pay gap is the difference in the average earnings between men and women across the workforce, expressed as a percentage of men’s earnings

  • It reflects overall differences in pay, not just unequal pay for the same job

  • Causes can include differences in occupation types, working hours, career breaks, seniority and discrimination

  • A positive gender pay gap means men earn more on average; a negative gap means women earn more on average

• Example

  • In 2023, the UK’s national gender pay gap was around 14%, meaning that, on average, women earned 14% less per hour than men