The Role of Absolute and Relative Wage Differentials in the Choice of a Work Activity

Abstract

A basic economic hypothesis states that, being equal, an increase in the wage at a certain work activity will attract labor to it. Economic theory tells us that the list of things includes prices of goods, wages in alternative activities, and real income. But what if are not equal and, in particular, if wages in alternative work activities vary simultaneously? It then seems natural to concentrate on wage differentials. It is said that labor will be attracted to the types of employment where wages increased more. There are, however, several questions concerning the precise nature of this approach: Under what conditions is it possible to dispense of the wage levels? That is, what are the conditions under which wage differentials play an independent role, and what are in these cases the other factors which affect supply? Finally, should wage differentials be measured in absolute or relative terms ? The purpose of this note is to analyze the role of absolute and relative wage differences in short-run' decisions concerning the choice of work activities within a given occupation and level of skill. Our framework is static demand theory. We focus on individual supply functions and assume that the individual views the amounts of time which he works (or may work) at different jobs as different commodities. Initially, we assume that it is feasible to combine work activities. The essentials of this approach have been outlined by Becker (1965, 1971, pp. 166-70). The first section of the paper is concerned with alternative specifications of the supply functions and the role of relative and absolute wage differentials in these specifications. We note that even if income (properly defined) is held constant, neither absolute nor relative wage differentials are sufficient to determine the allocation of labor. Either the wage level