Compensating Wage Differentials Essay

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“The theory of wage differentials is irrelevant because workers do not know the actual risks they face at work & therefore make wrong decisions…” Labour Economics 09 / 01/ 2012 Ana Cristina Hernández Garzona International Exchange Student C 1146401 In the labour markets we usually look how to get wage equilibrium? The answer depends pretty much in the kind of market you are looking at. Labour markets are affected by a variety of factors, such as changes in the external business environment, for example an increase in consumer demand for goods, and by changes in the internal business environment, like changes in production processes or new technologies. It is vital to point out that government intervention plays an important role determining a labour market equilibrium; new laws like the free movement of labour within the European Union or setting minimum wages distorts equilibrium and dries wages to higher or lower levels every single day. Another factor that influence a lot the reason why wages vary so much, is the preferences of the workers in the labour market. In other words, which jobs workers will like to have, which jobs they are not willing to work in, and what is the opportunity cost of their choice? Paraphrasing, what is the work force willing to give up or willing to accept to perform a particular type of job? People choose their job basing on their taste or preferences. This means they try to maximize utility finding the perfect combination of leisure, income and job activity; reaching the maximum aggregate sum of satisfaction or benefit that an individual can have from an optimal mix of factors. Workers face trade offs when choosing a job, and that trade off can be understood by the theory of wage differentials, defined as “the claim of workers for a higher pay as a reward for risk-taking”

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