Wage Differentials

Wage may differ in different types of employment, occupation, from industry to industry, between person to person in the same grade or level, from state to state or from country to country. These differences are termed as wage differentials

The wage differentials help in building the wage structures for various levels and types of jobs in an organization, as they are inevitable. They relate to skill, training and experience, nature and complexity of the job, responsibilities and accountability of the person doing that job and the economic and social status of the geographical area.

Wage differentials have a great economic and social significance, especially in under-developed or developing countries, as they are directly related to the allocation of economic resources of a country and are responsible for the growth of state or national income. This is because the literacy level, skill or expertise and learning attitude may have wide variations and economic development may be forcing employment.

Learn about:- 1. Meaning of Wage Differentials 2. Significance of Wage Differentials 3. Factors Influencing 4. Types.

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What is Wage Differentials: Meaning, Significance, Factors and Types

What is Wage Differentials – Meaning

Wage may differ in different types of employment, occupation, from industry to industry, between person to person in the same grade or level, from state to state or from country to country. These differences are termed as wage differentials.

The wage differentials help in building the wage structures for various levels and types of jobs in an organization, as they are inevitable. They relate to skill, training and experience, nature and complexity of the job, responsibilities and accountability of the person doing that job and the economic and social status of the geographical area. The bargaining power of unions and the earning strategies of the companies also affect the wage differentials.

As such, compensation differentials explain the presence of various pay structures in the same industry or market.

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What is Wage Differentials – Significance (With Some Other Importance)

Wage differentials have a great economic and social significance, especially in under-developed or developing countries, as they are directly related to the allocation of economic resources of a country and are responsible for the growth of state or national income. This is because the literacy level, skill or expertise and learning attitude may have wide variations and economic development may be forcing employment.

Secondly, doing the same job with differences in competence, confidence and quality consciousness may alter the cost of the product or service and so the cost to the worker. As such, wage or salary differentiation helps the organization in building compensation structures for various types of jobs and varying levels of supervisions.

Wage differentials reflect on:

i. Physical and mental ability of employee

ii. Productivity and efficiency of employee

iii. Labour mobility

iv. Demand and supply of labourers.

Some Other Importance of Wage Differentials:

Wage differentials have a great economic and social significance.

Its importance arises because:

1. It enables full employment of the resources of the economy to be attained.

2. It provides an important incentive for labour mobility as it brings about a re-allocation of the labour force under changing circumstances, so as to maximize the national product.

3. It facilitates desirable rate of economic progress. It is found that wage differentials giving the wide differences in demand and supply of jobs along with wide variations in job requirement like skill, ability, knowledge and experiences so on, ensures full exploitation of the national resources and thus is justified.

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What is Wage Differentials – Factors Influencing Wage and Salary Differentials

Wage differentials may be present due to any one or more of the following:

i. The personal policy of the employer to maintain differentiations

ii. Imperfection of the labour market to take its advantage

iii. Regulatory systems of employment

iv. Relative bargaining strengths of employees and employers

v. The value of the employee to the employer

vi. The growing importance of fringe benefits

vii. Degree of skill and training to do a job

viii. Nature of the work to be performed

ix. Nature of the role and responsibilities required

x. Differences in deficiency in workers

xi. Difference in agreeableness or social esteem of employment

xii. Extent of unionization and its strength

xiii. The extent of authorization

xiv. Centralization of decision-making

xv. Need of geographical growth for the national product.

Salary differentials are due to:

i. Market factors

ii. Strategy related factors

iii. Occupational factors, and

iv. Socio-economic factors.

Market Factors of Salary Differentials:

Market factors of global as well as regional labour markets influence demand for and supply of labour, which in turn determine wage levels.

i. Demand and supply factors – Increase in demand when the supply is constant or higher growth rate of demand relative to supply lead to increase in wage rates and vice-versa.

ii. Regional variations – Regional differences in demand and supply factors, skill level etc., also result in wage differentials. In addition variations in cost of living in different countries/cities/geographical areas result in salary differentials.

iii. Rural and urban differences – Cost of living, employment opportunities, variations in availability of infrastructural facilities like educational, medical and recreational result in wage differentials.

iv. Clusters and geographic concentrations – India can be divided on the basis of political boundaries, industrial growth factors and social regions. Industries concentrate in certain areas like Mumbai, Kolkata, Chennai and Delhi. Demand for employment in these regions would normally be high compared to other regions.

v. Industry and firm factors –

Wage levels vary based on the following factors:

a. Capacity to pay

b. Nature of work

c. Competitiveness of the firm and strategies, and

d. Working environment.

vi. Salary differentials due to occupational factors – Job demands vary from job to job based on job specification factors like

a. Nature and level of responsibilities

b. Educational qualifications and training

c. Knowledge, aptitude, attitude, skills

d. Mental and physical ability

e. Conditions of work

f. Length of experience.

vii. Salary differentials due to socio-economic factors – Socio-economic factors do also result in salary differentials.

They include:

a. National and regional economies

b. Per capita income

c. Number of educated unemployed

d. Social prejudices against taking up certain jobs

e. Prejudices against gender in taking up certain jobs

f. Practices of employing child labour

g. Exploitation of illiterates and unorganised labour.

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What is Wage Differentials – Classification of Common Types of Wage Differentials

The common types of wage differentials could be classified as:

(1) Employee’s Character Based

(2) Industry Based

(3) Regional Based.

(1) Employee’s Character Based:

Employee’s character can be defined as job matching personality, i.e., the type of occupation, level of skill and knowledge, working attitude and extent to which he/she can do the work independently.

They can be classified as:

(a) Occupational Wage Differentials

(b) Skill Based Differentials

(c) Gender Based Differentials

(d) Work Behaviour Based

(e) Extent of Supervision/Experience Based

(a) Occupational Wage Differentials:

Occupational differentials are based on skill, experience and training taken by the employees. These may be inter plant, inter industries and inter regional also.

Inter plant differentials imply the differences in pay for the same or a similar job in the same industry, while inter industry differentials are for the same or similar jobs between industries in the same locations or in the same labour market at the same time. They are the pay differences for the same kind of input.

(b) Skill Based Wage Differentiation:

The wage difference among different degrees of skill of the workers appears in these differentials. Skilled workers on an average earn more than semi-skilled, unskilled and casual workers in any industry and in any state or country. Generally companies have found it necessary to widen the skill differences to attract the requisite skill-holders.

(c) Gender Based Differentiation:

Generally some of the jobs may need a masculine role and some may need a feminine role for its effective performance. These considerations employ women for some roles and only men for some roles, but because of the difference in the capacity to work the pay or wages differ accordingly, creating wage/salary differentiations.

(d) Work Behaviour Based Differentiation:

The extent of efforts required to perform any task or work also vary, which necessitates W/S differentiation. Some may require manual work, some may require mixed efforts of machine and hand and some may require automation only to be supervised or monitored. Secondly, the complexity of work also makes differentiation in pay packages.

(e) Experience Based Differentiation:

The entry-level wage or salary needs a rise when the employee gains experience in doing that job, develops expertise and can improve the quality and productivity. This rise may vary according to the level of excellence achieved level of degree of supervision needed, and the number of years of experience. Such differentiations are referred to as experience based differentiations or extent of supervision based differentiation.

(2) Industry Based:

Industry based differentiations refer to the wage or salary payment according to the nature of the job, types of industry, technical knowledge or expertise required, their paying capacity according to the size of the company and differential wages in similar industries or neighbouring industries.

Accordingly, these can be classified as:

i. Nature of the organization

ii. Size of the organization

iii. Technology used

iv. Inter Industry based Differentials

v. Intra Industry based Differentials.

i. Nature of the organization – The pay packages may vary because of the nature of the organization, whether it is using a Hi-Tech process, manual process, automatic process, erecting or fabrication, repairing or machining shop, process industry, service industry, software or IT industry etc.

ii. Size of the organization – The size of the organization determines its paying capacity, span of control, budget on human resources and competitive strength to determine the pay packages. This also decide differentiations.

iii. Technology used – The nature of technology being used in a organization may require different skills and knowledge or expertise which become the factor for determining the varying pay packages.

iv. Intra Industries (inter plant) wage differentiation – In the same plant or industry, the employer may pay different compensation packages, based on differences in the quality of work, quality of labour, imperfection in the market, and differences in efficiency of plant or machinery. Other factors, which reflect wage differences, could be (a) Technology advancement, (b) Managerial efficiencies, (c) Financial capacity of the firm and (d) Age and size of the company.

v. Inter Industries wage differentiation – These differences arise when the workers in the same occupation and in the same area at the same time are paid different compensation packages in different industries in the same location.

Inter industries differentials generally arise due to the extent of unionization, their bargaining strengths, structure of the product market, the employer’s ability to pay and the stage of development of the industries paying a higher pay to expedite production. Other factors such as advancement in technology, managerial efficiency, financial strength and age of the company influence inter industry differentials.

(3) Regional Based:

Normally the wage or salary differences are due to the different living standards and the working conditions in the area where the industry or the business is located. The availability of manpower or the supply to demand ratio is another factor for regional wage differentials. In some of the cases, the work force for the same occupation may be coming from different neighbouring locations and are paid differently.

Wage or salary payment also varies according to the geographical, regional and state’s economic development stage or standard of life in the area such as:

(a) Geographical based

(b) State based

(c) Country based.

(a) Geographical based – The economy of the regions varies according to their geographical location and resource availability. The standard and nature of living influence the needs or expectations of the person of that location and so the compensation.

(b) State based – Similarly, the state’s economical and social standards may vary. The minimum wage concept may be different and so the varying pay packages.

(c) Country based – National socio-economic needs also affect the need for employment. The development stage decides the labour rates and the type of resource availability, which result in wage or salary differentiations.

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