Input Reward Differentials

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Input Reward Differentials

If all units of every input (such as labour) were the same, if all benefits were monetary and if inputs (workers) moved freely between markets, then input rewards (such as wages) would tend to be the same in all firms and industries. This is because all low paid inputs will move from their current use to those uses where payments are higher. This would create input shortages in low paid uses and input abundance in high paid uses, thus leading to equal payment in each use through interaction of market forces of demand and supply. However, in reality all units of the same factor do not receive equal payment, there are differences in wages amount workers as well as differentials in rewards earned by different units of other factors.

These differentials are of two types, (i) those which exist due to disequilibrium situation and (ii) those which persist even in equilibrium position.


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