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

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Introduction

Discuss the view that government policies aimed at reducing wage differentials always do more harm than good. [20 marks] The government can intervene and solve the problem of wage differentials in different ways. However there are different ways of tackling this problem therefore they use different polices for the short and long term. In a market economy individuals receive different incomes based on different supply and demand conditions, rewards will vary. If employees have a rare skill set and are limited and highly demanded then their earning will be significantly higher that someone who is pursuing a career with high supply and demand. ...read more.

Middle

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. ...read more.

Conclusion

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. ...read more.

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