Equilibrium Differentials

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Equilibrium Differentials

Some input – price differentials persist even in the position with no such internal mechanism that works to reduce them. Such differentials may be due to intrinsic differences in the quality of input or cost of acquiring skills or some non – monetary rewards that accrue in some occupations. Such differences are, called Compensating differentials, a term first used by Adam Smith, over two centuries ago. Some such differentials are discussed below.

Intrinsic Differences. Some units of a factor may be intrinsically superior to the others. Some lands are more fertile than the others and hence earn higher rent. Some workers are more efficient, intelligent and hard working and thus get higher wages than less intelligent workers.

Risk factor. Some jobs involve higher risk than the others. The difference between the payment received by a pilot and a driver does involve some reward for differentials in skills but payment to pilot also involves compensation for high degree of risk involved in the job.

Non-monetary Benefits. Non – monetary benefits such as flexibility in working hours, extent of leisure, freedom to pursure activities of one’s interest also cause differences in rewards. A University Professor may get less than what he could have earned in a corporate orginisation. But even a lower payment is acceptable to him as he has flexible work hours, long vacations and ample time to pursue research and also use his time for leisure. This is what explains why some highly capable persons move from corporate business that offers astronomical incomes to modestly paid academic jobs.

Besides the above factors, differentials in rewards to various units of the same factor can also arise due to such considerations as the location of job, whether it is somewhere in far flung areas or dull and dreary. Obviously, jobs in the far off areas and jobs that are dull or unexciting will carry a higher reward to attract people by offering higher compensation for such inconveniences of difficult jobs.


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