Understanding Wage Differentials and Identifying Factors That Affect It

Clare Parkinson

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15 Jan 2019

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The first step to understanding wage differentials is knowing the distinction between wage and salary.

In cases where marginal productivity determines pay, employees working in similar roles should ideally receive the same payment.

Yet, income begins to differ when you account for some factors. Considerations like geographical location, skill set, experience, background, gender, age, industry and more.

What is wage differential?

It’s the discrepancy in earnings between similarly skilled workers within various industries or locations. It also applies to the pay difference between various levels of experienced workers in the same industry or locations.

Factors affecting wage differentials

There are five major factors that affect the level of pay among groups:

  • Occupational: These are roles that’ll need employees with diverse skills within an organisation. The roles, responsibilities and skill set of all staff members will differ. So, it’s only right that the difference in skill is also reflected in their pay.

The variance in occupational pay can act as a motivator for your staff. It encourages them to undertake more challenging jobs or seek education and training to develop their abilities.

  • Regional: This alteration occurs when employees work in similar roles but at alternate locations. The most common factor that impact regional wage differential is the difference in the cost of living.

For example, an HR specialist in London might receive a way more than an HR specialist in Manchester with the same skill set and level of experience.

  • Personal: Differences in pay also occurs on a personal level. Staff members with similar skills might receive different salary offers in the same organisation. This could be because although they have the same qualification, they might have acquired dissimilar levels of skills. The personal wage differential is more likely to happen if you adopt a skill-based pay system.

  • Organisational: On this level, businesses offer different salaries to workers with similar backgrounds. It involves similar industries and geographical locations.

Causes include:

  • Organisational policies.
  • Quality of labour.
  • Available technology.
  • Financial capability.
  • Company size.

Industrial

These differences occur with workers in similar roles and location but in different industries. They're a result of varying skill set and an imbalance in the demand and supply of employees with such skills. The discrepancy in wages can also be because of the stage of development of the industry or the level of unionisation in the industry.

Implications of wage differentials

Disparities in pay can affect individuals, both at a macro and micro level.

Macro: Salary variations determine the allocations of recourses. These resources go on to determine a growth pattern in the economic system. For example, if HR jobs offer higher salaries than marketing jobs. It’s logical that the economic system becomes geared towards developing individuals to work in the HR industry.

Micro: At this level, salary variations show that some organisations use proactive strategies to attract better talents compared to their competitors. You'll consider competitors that account for differences in salary as trendsetters. They're also more likely to attract the best talent compared to competitors.

Compensating wage differentials

This is the total amounts of cash and non-cash payment made to employees to motivate them to accept an undesirable job.

Compensating for the variance in recompense involves earning a higher pay for a lower skilled job. A staff member gets this when the working conditions are either unsociable, dangerous or unpleasant.

It also means that higher skilled workers in the same organisation can earn lower wages compared to lower skilled workers.

This may occur if the organization feels that the higher skilled workers gain extra perks like working in a flexible, nice and safe environment.

How to calculate compensating wage differentials?

Compensation comes in many forms. There are no limits to monies paid to an employee.

Other forms of compensation include bonuses, profit share, commission, overtime, perks, discounts and more.

Calculating wage compensating differentials depends on how much income is necessary to compensate your staff for working in an unpleasant or dangerous working environment.

Expert Support

For an in-depth and tailored approach to managing your employees’ pay & benefits, speak to a Croner specialist. Call us today on 01455 858 132.

About the Author

Clare Parkinson has over 20 years’ experience in the Croner Reward business. As Business Manager, Clare leads a team of Reward Consultants who specialise in the delivery of pay and grading related advice, including tailored pay benchmarking and gender pay reports.

Over the years, Clare has contributed to various industry publications on topics such as gender pay, executive remuneration and market pay trends.

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