Exercises: Wage differentials

Define the term "wage differential". Give two examples of wage differentials that exist in the Irish economy.

Explain why a surgeon in a Dublin hospital is likely to earn more than a hospital porter. Refer to at least three factors.

Distinguish between "compensating differentials" and "differentials due to human capital". Classify each of the following as one or the other:

1. a) Extra pay for offshore wind-farm technicians working in dangerous conditions.

1. b) Higher pay for a worker with a master's degree.

1. c) Night-shift allowance for a nurse.

Aoife is deciding whether to take a three-year degree course. If she works immediately, she earns €26,000 a year from age 18 to 65 (47 years). If she studies, she pays €3,000 in fees each year and earns nothing for three years, then earns €38,000 a year from age 21 to 65 (44 years).

1. a) Calculate her total lifetime earnings (ignoring discounting) in each case, including the cost of fees.

1. b) Which option is financially better, and by how much?

1. c) State two non-financial factors that could affect her decision.

Average hourly pay in a particular year in Ireland was €22 for men and €20 for women in the same occupation group.

1. a) Calculate the gender pay gap as a percentage of male pay.

1. b) Give three possible explanations for such a gap, distinguishing between explanations based on productivity and those based on discrimination.

1. c) Suggest one policy to reduce the gap and one possible limitation of it.

A trade union negotiates a wage of €24 per hour for electricians, above the market equilibrium wage of €20. At €24, 8,000 electricians are demanded and 11,000 are willing to work. At €20, 10,000 are employed.

1. a) Describe what happens to employment in the trade and calculate the number of workers who are unemployed or excluded at €24.

1. b) Explain how this affects the wage differential between unionised electricians and workers in non-unionised sectors.

1. c) Discuss who gains and who loses.

"Wage differentials between occupations in Ireland are entirely explained by differences in productivity."

Evaluate this statement. In your answer, refer to compensating differentials, human capital, labour market imperfections (such as trade unions and immobility of labour), discrimination and the role of supply and demand.

Two occupations have the following features. Occupation A (data analysts): demand is high and growing, entry requires four years of training and supply is relatively inelastic in the short run. Occupation B (retail assistants): demand is stable, no formal qualifications are required and supply is highly elastic.

1. a) Using supply and demand diagrams described in words, explain why the equilibrium wage is higher in A.

1. b) Explain what will happen to the differential over ten years if the number of training places for data analysts doubles.

1. c) Discuss the likely impact of the differential on geographical and occupational mobility in Ireland, including housing costs in Dublin.

An Irish firm pays a worker €30 per hour. Her MRP is €36 when the labour market is competitive. In a different scenario, the firm is the only large employer in a rural town (monopsony) and the labour supply is $W = 10 + 0.002L$, where $L$ is the number of workers, while MRP = $50 - 0.004L$.

1. a) In the monopsony case, derive the marginal cost of labour and find the profit-maximising employment and wage.

1. b) Find the competitive wage and employment (where $W = MRP$) and compare with a).

1. c) Explain how a legal minimum wage set at the competitive wage would affect employment in the monopsony case.