Wage differentials refer to the differences in pay between workers, groups, or different types of jobs. These gaps occur because workers have different skills and because labour markets do not always operate perfectly.

Common causes of wage differentials:

• Skill levels: Workers with more training or education (human capital) usually earn higher wages.
• Job conditions: Dangerous or unpleasant jobs often pay more to attract workers (compensating differentials).
• Location: Cost of living and local demand in different regions affect pay.
• Discrimination: Differences based on gender, ethnicity, or age that are not related to how much work a person produces.
• Limited mobility: Some workers cannot easily switch jobs due to barriers, preventing competition.
• Labour supply: Differences in how easily the supply of workers can change in a specific job field.

Types of differentials:

• Horizontal: Different pay for the same job, often due to seniority or unfair treatment.
• Vertical: Different pay for different jobs, usually based on skills and level of responsibility.

Wage differentials can be efficient when they reward higher productivity, or inefficient when they are caused by unfair barriers or discrimination.