What are the major factors determining the earnings differential between skilled and unskilled workers - Essay Example

What are the major factors determining the earning differential between skilled and unskilled workers? Studies have shown that there is a significant difference between the earning of graduates and non graduates. The common term used for the graduate is a skilled worker and the others workers are referred to as unskilled workers. The rapid changes in the wages between skilled and unskilled workers have brought about various controversies from varying stakeholders and scholars (Hübler & Meyer 2000, p. 4). Studies have shown that the wage structure varies across location, industries, occupation as well as time.

With time, the wages structure has rapidly changed. This can be directly attributed to changes in the level of growth in various countries over the years. Sometimes back, companies were on an expanding mission, and there came a time when expansion was more of using advanced technology in the production of their products. Therefore, time can be termed as one of the factors, which has attributed to varying wages between skilled and unskilled workers (Brenton 1999, p. 4). Most European countries’ skilled workers supply is increasing, while wages is behaving differently.

The most standard explanation mostly used to justify the non-decreasing differentials as compared to the rising supply is that technological progress has favored skilled workers. The key factor, which can be used to determine these differentials, is the rate of technological progress in terms of its pace and intensity. Other factors leading to different earnings between skilled and unskilled workers include technical progress and trade expansions (Currie & Yelowitz 1999, p. 24). Technology is dynamic because it is ever changing to accommodate new development.

When there is a change in technology, more skilled workers are required to maneuver the advanced machines. This is not the same case for the unskilled workers who are laid off and their responsibilities taken over by the technologically advanced machines. The skilled workers mostly posses skills, which are compatible with the changes in technology thus they are better placed as compared to the unskilled workers (Currie & Yelowitz 1999, p. 27). The wages of those workers who have exceptional skills, which are unique and relevant to the new technologies, are extremely sought by companies, and well paid because their services are in high demand while their supply is low.

However, the unskilled lots are poorly paid because their supply is high while their demand is low. The unskilled workers are not in a position to bargain for a better deal because there is a risk of even losing that opportunity (Brenton 1999, p. 4). Occupation is another aspect, which has contributed to the huge differences between the wages of the skilled workers and those who are unskilled. Studies have shown that the demand for unskilled workers is lower compared to that of skilled workers.

One of the reasons attributed to this behavior is due to their differences in terms of marginal productiveness (Gautier 1998, p. 125). These differences are directly correlated to the physical productivity of the skilled and unskilled workers. However, these differences are as a result of the prices paid for the goods these workers help producing. Individuals such as physicians are extremely well paid because they offer services in an industry that is rewarding. Their supply is limited due to the high cost associated with training and acquiring the necessary skills (Hübler & Meyer 2000, p. 6). The relative demand for skilled labor is said to be on a rising note, which is occasioned by the fact that skilled labor is biased in relation to technical change.

This means that those people have an advantage as compared to those individuals who do not have skills and training. This is because the skilled workers will most likely fit somewhere even when there is a small technical change. If an individual with skills observes that technical change is undermining their skills, there is that room that they can go back to class and learn a few new things (Gautier 1998, p. 127). In many countries, workers in careers that are directly related to changing techniques have to keep updating themselves about the new skills, which are related to their field of work.

This enables them to remain relevant in the market and at the same time remain competitive. On the other hand, the unskilled workers have little they can do to remain relevant in their various fields. The best they can is work extra hard and hope their employer notes and decides to maintain them, though their wages getting better is quite hard (Brenton 1999, p. 4). International trade has contributed significantly in the wages differentials when it comes to skilled and unskilled labor. The act of developed countries trading with the less developed countries has resulted to decreased demand for domestically manufactured goods, which in turn decreases the demand for unskilled workers.

This is because many countries mostly outsource skilled labor that is well paid; when unskilled labor is outsourced, which rarely happens, the wages paid out are still low compared to skill labor. Also, when unskilled labor is outsourced, it just increases the supply of the unskilled labor prompting to even a lower pay to the domestic unskilled labor. This is mostly the case if the cost of outsourcing labor is lower than the domestic ones. Companies can even decide to retrench the unskilled worker and replace them with the outsourced workers.

The diagram below is a perfect illustration French, (Mazumder & Taber 2005, p. 67). Figure one: Figure one represents a competitive market. If we consider an increase in production to international trade and a shift in demand for labor, a country’s economy will move from point A to D along the supply curve S0. Therefore, the developing countries produce a shift in the supply curve towards the right, which result in employment increasing from point D to C. There is a direct correlation between lower level of development and wages reduction to point D.

Over the last couple of years, changes have been experienced between industries. Manufacturing industries, which mostly employed unskilled workers, is being replaced by service industries, which prefer the skilled workers. This has also contributed on the wage inequality between skilled and unskilled workers (French, Mazumder & Taber 2005, p. 69). References list Brenton, P. (1999). Global trade and European workers, New York, St. Martins Press. pp. 3-8. Currie, J. M., & Yelowitz, A. S. (1999).

Health insurance and less skilled workers, Cambridge, MA, National Bureau of Economic Research. pp. 21-31. French, E., Mazumder, B., & Taber, C. (2005). The changing pattern of wage growth for low skilled workers, Chicago, Federal Reserve Bank of Chicago. pp. 67-70. Gautier, P. A. (1998). Do more high skilled workers occupy simple jobs during bad times?. Amsterdam, CPB Netherlands Bureau for Economic Policy Analysis. pp.123-131. Hübler, O., & Meyer, W. (2000). Industrial relations and the wage differentials between skilled and unskilled blue collar workers within establishments: an empirical analysis with data of manufacturing firms, London, IZA. pp.3-7.