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The unemployed naturally make a great deal less money than those who are working. But even among the employed, there are income differences, sometimes dramatic ones. Why do some workers earn more than others? To begin with, there is the fact that some workers have a greater marginal revenue product than others. This may be because the better-paid ones are more skilled, or it may be because the jobs they work at generate more economic output (in a given time period) than other jobs. However, there may be factors at work that don’t directly relate to workers’ productivity.
We will review three causes of inequality that are not based on differences in worker productivity: compensating differentials, labor unions, and wage discrimination.
Compensating Differentials
Some jobs are dangerous—commercial fisherman, logger, coal miner. Other are fairly safe but can be unpleasant—insulation installer, for example (fiberglass is itchy). Some of these jobs might prompt one to say, “You couldn’t pay me enough to do that.” But there are people who can be paid enough to do those jobs. The extra pay these people earn, compared to similarly skilled people doing similar but less onerous work, is called the compensating differential. People who receive compensating differentials earn more than others in exchange for paying a non-monetary “price” in the form of bad working conditions.
Labor Unions
A labor union is a collective of workers who rally together to force a firm to spend more money on each worker, some in the form of paycheck wages and some in the form of benefits (and maybe some to improve working conditions). Where workers are unionized, the firm has to negotiate with the union rather than with each worker individually; this process is called collective bargaining. If the union and the firm can’t agree on employment terms for workers, the union may call a strike, a deliberate work stoppage intended to put pressure on the firm to meet the union’s demands.
Wage Discrimination
When two similarly qualified, equally productive people doing the same job are being paid significantly different wages, there are several possible explanations. Perhaps one asked for a raise and the other didn’t. But when the two workers are a man and a woman, or two people of different ethnicities, there’s a chance wage discrimination is involved—a difference in pay based on an irrelevant group characteristic such as gender or race. There are federal laws prohibiting this, but it does occur. At the same time, wage discrimination can be difficult to prove.
