Module 4 Wage Compensating Differential
Module 4 Wage Compensating Differential
Module 7 – Market
Compensating Wage Differential
Equilibrium
MODULE 4
MODULE OVERVIEW
Understanding wages is essential for comprehending the concepts of of employment and income distribution.
Upon completing this module, you'll understand key wage concepts including theories of wages, the impact
of supply and demand on wage structures, and the workings of minimum wage laws. You'll also explore
income inequality measurement, compensating wage differentials, and the superstar phenomenon. This will
equip you to analyze factors influencing wages and compensation differentials in the labor market effectively.
LEARNING OUTCOMES
LEARNING CONTENTS
In labor economics, the term "wage" refers to the payment that workers receive for their labor. This payment
may be in the form of an hourly rate, a salary, or some other form of compensation, such as commissions or
bonuses. The wage rate is typically determined by supply and demand in the labor market, with workers
generally receiving higher wages in industries or occupations where there is high demand for their labor,
and lower wages in industries or occupations where there is less demand.
Theories of Wages
Wage theory explains the determination of how wages are set in the labor market or in the economy. There
are several theories that attempt to explain the determination of wages in the labor market. These theories
include the following:
The more capital there is, the higher wages can be because there will be more investment
opportunities and therefore more demand for labor.
Behavioral Theory
▪ Developed by some behavioral scientists (viz. March and Simon, Robert Dubin, Eliot Jacques)
▪ According to them, the amount of wage to be disbursed among the workers is determined by
various factors such as employer’s concern for the workers, size of company, prestige attached to
certain jobs in terms of social status, etc. that determine the amount of wage to be disbursed among
the workers.
The minimum wage is the lowest wage rate that employers are legally allowed to pay their workers. The
minimum wage is typically set by the government, and it is intended to ensure that workers are able to earn
a fair wage for their labor.
Minimum wages have been defined by International Labor Organization (ILO) as “the minimum amount of
remuneration that an employer is required to pay wage earners for the work performed during a given
period, which cannot be reduced by collective agreement or an individual contract”. –
The minimum wage is typically set at a level that is intended to cover the basic needs of workers, such as
food, shelter, and clothing. It is also intended to protect workers from being exploited by employers, who
may be tempted to pay very low wages in order to increase their profits.
▪ Initially, minimum wages covered relatively few categories of workers and sought to protect those
considered to be especially vulnerable.
▪ By the end of the 20th century, most nations had implemented minimum wage legislation.
▪ New Zealand was the first country to implement a minimum wage in 1894, followed by the
Australian state of Victoria in 1896, and the United Kingdom in 19
▪ Over 90% of 186 ILO member States have one or more minimum wages set through legislation or
binding collective agreements
▪ In recent years, minimum wage systems have been established or strengthened in many countries
to address working poverty and inequality
▪ The purpose of minimum wages is to protect workers against unduly low pay.
▪ They help ensure a just and equitable share of the fruits of progress to all, and a minimum living
wage to all who are employed and in need of such protection.
▪ Minimum wages can also be one element of a policy to overcome poverty and reduce inequality,
including those between men and women, by promoting the right to equal remuneration for work of
equal value.
There are several factors that can determine the minimum wage rate in an economy. Some of the main
factors include:
▪ The cost of living and changes or increases therein. The minimum wage is typically set at a level
that is considered to be sufficient to meet the basic needs of workers, such as food, shelter, and
clothing. As the cost of living increases, the minimum wage may also need to be adjusted to ensure
that it remains adequate for workers to meet their basic needs.
▪ Demand for living wages
▪ Wage adjustment vis-a-vis the consumer price index
▪ The needs of workers and their families
▪ The need to induce induces industries to invest in the countryside
▪ Prevailing wage levels
▪ Fair returns of the capital invested and employers’ capacity to pay
▪ Effects on employment generation and family income; and
▪ Equitable distribution of income and wealth along the imperatives of economic and social
development
▪ Income from labor is a major determinant of standard of living that affects the quality of life.
▪ Income inequality determines that extent of disparity in the distribution of income between
individuals, group of people, or countries.
▪ Inequality can be examined by looking at the size distribution of income, the functional distribution
of income, the distribution of income by recipient, the distribution of wealth, or the extent and nature
of poverty.
▪ Income inequality refers to the uneven distribution of income across various segments of a
population. In simpler terms, it means that a small percentage of the population earns a
disproportionately large share of the total wealth, while the rest earn significantly less.
▪ The Lorenz curve and Gini coefficient are two commonly used tools for measuring inequality in an
economy.
▪ The Lorenz curve is a graphical representation of the distribution of income or wealth in an
economy. It plots the percentage of total income or wealth on the vertical axis, against the
percentage of the population on the horizontal axis. The curve shows how much of the total income
or wealth is held by different segments of the population, from the poorest to the wealthiest.
▪ The Gini coefficient is a measure of inequality that is calculated based on the Lorenz curve. It is a
number between 0 and 1, with 0 representing perfect equality (where everyone has the same
income or wealth) and 1 representing perfect inequality (where one person holds all of the income
or wealth). A higher Gini coefficient indicates greater inequality in the distribution of income or
wealth.
▪ Together, the Lorenz curve and Gini coefficient provide a useful tool for measuring inequality in an
economy, and can help policymakers and researchers to identify trends and patterns in the
distribution of income and wealth.
There are several factors that can affect income inequality, including:
Ability and attributes. Ability refers to one's ability to complete a task or job, and it can be affected by hard
work and perseverance. Attributes are things like personality traits or physical characteristics that make
someone more capable of earning money than others around them.
Education and training. These are two very important factors that can influence how much money
someone makes. The more education and training someone has, the more likely it is that they will make
more money than someone who does not have as much education or training. This is true across all levels
of education—from those who only completed high school to those who have graduate degrees or even
doctorates.
Work and Leisure. Workers who work more hours have higher incomes, and thus can afford to buy more
goods. This means that they're able to afford a larger share of the overall wealth of society. Conversely,
leisure time impacts income inequality by reducing or increasing one's ability to earn money.
Risk taking. This can affect income inequality in a variety of ways. First, if people are more risk-averse,
they will be less likely to start a business and work their way up the income ladder. Second, if they're risk-
averse, they'll be less likely to take on high-risk investments or gamble at casinos or other places where
there's a chance of losing money. This means that they won't be able to earn as much money as those who
are willing to take risks.
Wage Discrimination. Wage discrimination is when an employer pays one employee less than another for
the same job. It can be based on race, gender, age, or other factors. This can happen because employers
may have something against those groups of people, or they might just not want to pay more to an
employee who's better at their job or has more experience or education.
Unequal distribution of wealth. Income inequality is when there are large gaps between the incomes of
different groups within a country or society. For example, a small group of people controls a large amount of
money and resources, while most people have very little.
A wage is an amount of money that is paid directly to an employee for their work. Wages are often paid
weekly or biweekly in cash or check form, but some employers may offer direct deposit as an option for
wage payment. Wages can be based on a standard hourly rate, piece rate (the number of products
produced), or commission (the number of sales made).
A salary is a fixed amount of money paid on a regular basis to an employee. Salaries are typically paid
monthly or annually in the form of a check or direct deposit into the employee's bank account. Because they
are fixed amounts, salaries do not change based on productivity or sales figures like wages do.
1. Credentials. Workers who have advanced education or hold professional certification or licensure
may earn more than other workers in the same occupation who don't have these credentials,
especially when credentials are sought after by employers.
2. Experience and skill. Often, the longer you do a job, the more productive you become. As a result,
experienced workers usually earn more than beginners. Workers who have in-demand skills also
may earn more.
3. Industry or employer. Occupational wages vary by industry and employer. Diverse working
conditions, clientele, and training requirements are among the reasons why wages might differ from
one employment setting to the next.
4. Job tasks. Jobs for a specific occupation often have similar position descriptions, but individual
tasks may vary. And jobs involving more complex tasks or greater responsibility may have higher
wages than those that don't, even within the same company.
5. Geographic location. Some states or areas have higher wages than others for jobs in an
occupation. Local demand for the work and cost of living are among the geographic factors affecting
wages.
6. Success and performance. Some occupations are extremely competitive, and a small number of
workers who are successful in them often have very high earnings. Workers whose pay depends on
their job performance also might have very high wages or very low wages.
Earnings of Superstars
▪ The earnings of superstars can be explained by supply and demand. They have a rare talent and
can perform at a high level.
▪ The Superstar Phenomenon is characterized by a small number of persons dominating their and
earning tremendous sums of money. The reason superstars earn so much compared to others is
because they bring in more revenue than the average worker. The more revenue a company
generates, the more money each employee makes.
The superstar phenomenon refers to the idea that in certain industries or markets, a small number of
individuals or firms are able to achieve disproportionate levels of success and popularity compared to their
competitors. This can be due to a variety of factors, such as superior talent, unique abilities, or access to
resources and opportunities.
In the world of professional sports, a small number of athletes are able to achieve superstar status and earn
significantly more money and fame than their peers. For example, professional basketball players like
LeBron James and Stephen Curry are considered superstars in their sport. In the music industry, a small
number of musicians are able to achieve global fame and success, earning significantly more money and
recognition than most other musicians. For example, musicians like Taylor Swift and Justin Bieber are
considered superstars in the music industry.
▪ The labor market is not characterized by a single wage: workers differ and jobs differ.
▪ Adam Smith proposed the idea that job characteristics influence labor market equilibrium.
▪ Compensating wage differentials arise to compensate workers for non-wage characteristics of the
job (i.e. how ‘pleasant’ or ‘unpleasant’ a job is).
▪ If a job is unpleasant, the firm must probably offer a higher wage to attract workers and vice versa.
▪ Workers have different preferences and firms have different working conditions.
Intro
NAME: ________________________________________ STUDENT NUMBER: __________________________
YEAR, COURSE, & SECTION: _____________________ DATE SUBMMITED: __________________________
INSTRUCTOR-IN-CHARGE: _______________________ SCORE/NUMBER OF ITEMS: __________________
LEARNING ACTIVITIES
ACTIVITY A
True or False. Determine whether each of the following statements is true or false. Write the answer on the
blank space provided after the number.
ACTIVITY B
Identification. Identify what wage theory is associated with each of the following. Write the answer in the
space provided for.
16. A worker will be paid more the more productive he is. __________
17. Wages are determined by the amount of capital available for investment. __________
18. Wage is disbursed according to the prestige attached to a certain job. __________
19. Wage is determined based on employer’s concern for the worker. __________
20. Pay tends to be higher if workers have more bargaining power. __________
21. Wage rate equals the minimum amount necessary for a worker to survive or for subsistence.
__________
22. The exchange value of any product was determined by the hours of labor necessary to produce it.
__________
23. The higher the firm’s capital, the higher the wage rate __________
24. Wage is paid to workers after the payment of all other factors. __________
25. Employers compensate employees depending on their contributions to production. __________
ACTIVITY C
Classification. Determine if each term is associated with wage or salary. Write the answer in the space
provided for.
26. Paid weekly or biweekly in cash or check form _________
27. Work of a waiter who earns 2 dollars per hour _________
28. Generally fixed in advance and does not change during the course of employment. _________
29. Paid on a regular basis to an employee _________
30. Skilled IT workers in a company _________
31. Variable rate of payment _________
32. The renumeration of health professionals _________
33. Income payment for labor resource _________
34. No overtime pay _________
35. No work no pay _________
ACTIVITY D
Classification. For each of the statements below, determine the factor that contributes to income inequality
Write the answer on the space provided for after the item.
Ability and Attributes Education and Training
Work and Leisure Risk Taking
Wage Discrimination Unequal Distribution of Wealth
36. An employer pays different wages to two individuals of equal ability and productivity. __________
37. Adrian, a call center agent, puts in longer work hours than most other agents. __________
38. Sarah Geronimo is born with exceptionally good voice and looks that made her a successful singer.
__________
39. Fatima, a good musician, chooses to stay home with her children. __________
40. Jack enters the labor force after graduating from high school, while Jill takes a job only after earning
a college degree. __________
41. Imelda learns valuable new skills each year in her job that results to her income growth over time.
__________
42. Antonio is very willing to take arduous and unpleasant jobs in order to earn more. __________
43. Because of a very weak mental endowment, Joanna is working in a low-paying occupation.
__________
44. Peter Lee, a business magnate, receives a regular greater income derived from his real estate
business.
45. A clerk who is working 40 hours a week earns a little income, while the stockholder of a corporation
who is only working 10 hours earns a substantial income.
46. Marco is blessed with the physical capacity and coordination to become a highly paid professional
athlete. __________
47. Edna experiences lower wages and unequal labor practices compared to other employees.
__________
48. Danilo, an easy-go-lucky guy, prefers to spend more time travelling than working. __________
ACTIVITY E
ACTIVITY F
Study Questions. Answer the following questions as concisely yet as clearly as possible. (3 points each)
56. Explain why others are paid more than the others.
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57. Select one theory of wages and discuss its application to a particular type of labor marker.
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58. Explain how wage and salary they differ in how they are received by workers.
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60. Give one example of a labor market where compensating pay differential applies and analyze how
the theory presents itself there.
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ACTIVITY F
Online Work. Look from Google Scholar one published local or foreign study related to minimum wage
legislation. Study the research article and fill in the matrix below. (30 points)
Research Title
Author/s
Date Published
Abstract
Introduction (Simplified)
Methodology (Simplified)
Research Citation
ACTIVITY G.
Creative Work. Create an infographics about the concept of superstar phenomenon. Make sure to use
visuals, icons, and text to highlight key ideas and information about the topic. You may use the Canva App
as a tool for creation. Upload the digital copy in PDF or JPG of your infographics to Google Drive using the
following link: https://bit.ly/3uxUmdk. For guidance, he rubric for grading the infographics can be downloaded
here: https://bit.ly/3HgBI0R.