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Explain the functions of wage differentials in a market economy.

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Introduction

Explain the functions of wage differentials in a market economy. Wage differentials occur in all markets, in some cases these differentials act to attract people to the market who would not ordinarily consider those jobs and to reflect the rarity of skills etc., however there are also other wage differentials, which occur due to market imperfections and discrimination on the part of the employer. Labour market imperfections can occur on both the supply and demand side or in some case both sides. Wages are lower when the employer is a monopsonist because they act as a monopolist and can erode union control of the labour in the market. On the supply side of the labour market Trade Unions cause imperfections, by using the threat of strikes and labour supply they can force up wages to the detriment of employment levels. When the market has both demand imperfections in the form of monopsony and supply imperfections in the form of Unions the wage will depend on the negotiating position of the two sides. There can be wage imperfections when information failure occurs, employees may be misinformed about the availability of jobs at different wages. ...read more.

Middle

will all be used to increase market supply. Regional variations can also explain certain wage differentials, as wages are high in certain areas then labour will be drawn there, however, firms will try and do the opposite. Through the push and pull of certain factors, in the long run, the market should correct any regional differentials especially in key work areas. Discrimination can also account for certain wage differentials, racial and gender discrimination can account for a large amount of the differential in wages between white males and the rest of the working population. Employers will pay women and ethnic minorities less due to ill-informed views about the intelligence, loyalty and productiveness of female and non-white workers. The govt. has taken some action to counteract these unwanted and unproductive wage differentials with the introduction of the Equal Pay Act, the Sex Discrimination act and the Race Relation Act. Wage differentials in a market economy are there to correct and compensate for differences in labour markets, however they are not all perfect and can be divisive and unproductive. Using the data in Extract B assess the view that the gap between male and female earnings has been substantially reduced since the mid ...read more.

Conclusion

For more labour flexibility the powers of unions have to be severely reduced. It is characterised by opponents of flexibility as giving all the power to the firms allowing them to treat workers as they so wish leaving them insecure and unproductive. The alternative to the idea of flexibility is wholesale government intervention to insure that workers are secure in their jobs and therefore they will be more open to advancing their skills and they will be more productive. Supporters of the idea of flexibility claim that it will improve economic efficiency by leaving labour demand and supply to market forces. However, it is arguable whether government intervention to counteract such failures as racist and gender discrimination is truly damaging the UK economy. Another argument against the ideas of ultra flexibility is that it breads poverty and a wage gap. We can see from the US economy where government intervention is low, broadly speaking GDP is increased and unemployment is relatively low however the gap between high-wage and low-wage workers pay compared to the median is far greater in the US to the figures for Europe where governments are not afraid to intervene where necessary. Martin Fox BPH 12/08/03 ...read more.

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