Discuss the view that government policies aimed at reducing wage differentials always do more harm than good. [20 marks]

One way the government can reduce wage diffentials is by setting a minimum wage. A minimum wage will help those who’s bargaining power is weak, therefore individuals will have sufficient income to pay bills and have a fairly good standard of living. However it is hard to set a minimum wage as it is hard to put a price on the minimum amount one must be paid an hour. Also it raises cost for firms as they have to pay employees a certain amount, when the money could be used to expand the business.

Another short term method of reducing wag differentials is by using progressive taxation. With a progressive tax, the marginal rate of tax exceeds the average rate of tax. As a result, progressive taxes act to reduce inequalities in the distribution of income. Essentially the richer have to pay more tax and the poorer will pay less therefore the wage gap reduces. Those with higher risk jobs should be paid more too for example miners compared to a cleaner have a far more dangerous job. Therefore those who are willing to work in a high risk where supply of labour is inelastic should be paid more.

In the long run however education training will reduce wage differentials. By investing in human capital it will increase the productivity of labour so it increases workers earning potential as their MRP increases. However a drawback of investing in education and training is there are time lags as it takes a long time for individuals to gain the skills to become for example a teacher or in extreme cases a brain surgeon. Also it is very expense there taxes may increase so you could argue that this does more harm than good as taxes rise but overall it is benefiting the labour market.