Wage differentials and labour immobility

The big picture

An observed wage differential is a composite. Part of it is a real MRP and human capital difference, part is a compensating differential for unpleasant work, part is institutional (unions, pay scales, the wage floor), and part is market failure: employer wage-setting power or discrimination. Strong essays disaggregate the market rather than backing one cause, and the judgement worth rehearsing is that a differential is partly a market outcome and partly a market failure requiring correction. Which part dominates varies across the pay distribution: MRP does most of the work at the top, institutions in the middle, and bargaining power at the bottom.

Immobility is why wage signals fail. Shortages and differentials persist because workers cannot respond to them, and for two decades EU free movement hid how immobile the UK workforce had become: an elastic buffer of EU-trained workers answered every wage signal, so nothing forced the domestic pipeline to work. Removing free movement in January 2021 ran the experiment no economist could have licensed, and the results, 25 to 35% real wage rises in the skilled trades and mass vacancies, showed the immobility had been there all along. The standing evaluation line follows: immigration raises the elasticity of labour supply in the short run and leaves the causes of immobility untouched, so it makes immobility tolerable rather than curing it, and the dependency compounds the structural problem over time.

The theory

Run the causes of differentials through the demand and supply framework. On the demand side, MRP differences and the human capital behind them place one occupation's demand curve far above another's. On the supply side, elasticity does the quiet work: a surgeon stands behind seven to fifteen years of medical training, so supply is near-vertical and demand growth feeds almost entirely into the wage; a barista can be trained in days, so supply is near-horizontal and demand growth feeds into employment instead. Layer on the institutional causes: union density asymmetries, centralised pay scales, a wage floor compressing the bottom, employer wage-setting power holding pay below MRP for immobile groups, and discrimination, visible where gender pay gaps survive within grades after controlling for hours and experience, and where historically feminised roles remain undervalued.

The causes of immobility split in two. Occupational barriers are training pipelines (a four to five year apprenticeship, a three year nursing degree, a PGCE), information failure about the returns to training, the debt and opportunity cost of retraining, and policy own goals such as the 2017 abolition of the nursing bursary, which cut applications by around a third. Geographical barriers are housing costs (a London house price equals several years of a Band 5 nurse's take-home pay), family ties, school catchments and caring responsibilities, transport costs, and centralised pay scales that remove the incentive to move at all. The consequences go beyond a persistent differential: vacancies leave output below productive potential, and the welfare loss of homes unbuilt and operations delayed during the pipeline lag is permanent, since the years cannot be re-run. Workers trapped in declining sectors face structural unemployment and skills atrophy, and the burden falls hardest on lower-income households who cannot buy private alternatives to understaffed services.

Migration is the fastest way to shift labour supply. In the competitive diagram immigration moves supply right, lowering the wage and raising employment, yet the actual effect depends on whether migrants are substitutes for domestic workers, competing for the same jobs, or complements who fill roles domestic workers cannot or will not, enabling output with little wage effect. Where wages are administered, as with NHS pay scales, a supply shift moves vacancy rates rather than the wage, a favourite examiner point about institutional exceptions to the model.

Application

The post-Brexit natural experiment supplies the evidence. EU workers were about 8% of the construction workforce, up to 30% in some trades; after free movement ended, electricians, plumbers and gas engineers gained 25 to 35% in real wages between 2021 and 2024 while around 40,000 trade vacancies stood open in 2023. Agriculture, roughly 98% dependent on EU seasonal labour before Brexit, saw £60m of produce unharvested in 2021 (NFU) despite the Seasonal Worker Visa expanding from 30,000 to 45,000 places. Hospitality, about 25% EU-staffed in 2019, recorded real wage rises of 8 to 12% in 2021–23 and over 100,000 unfilled posts in 2022. Deploy these as counterfactual evidence: had EU workers been substitutes, their removal would have lifted domestic employment; instead output fell and vacancies rose, so they were complements masking immobility.

For discrimination and bargaining power, use the litigation carefully. The Tesco equal pay case (Reading tribunal, 2025) involves around 60,000 claimants and up to £4bn in back pay over an alleged £5.50 per hour gap between predominantly female store floors and roughly 90% male warehouses; present the below-MRP claim as an allegation the tribunal has yet to rule on. The BBC's Carrie Gracie settlement (2018) is the confirmed case: an Equal Pay Act violation against equivalent male editors. For insecure work, the figures are ONS 2023 (3.5% of the workforce on zero-hours contracts), TUC 2023 (average ZHC pay of £10.40 an hour against a £14 median), DWP data showing self-employed median earnings persistently £5,000 to £6,000 below employees', and Uber BV v Aslam (Supreme Court, 2021), which reclassified drivers as workers and granted the minimum wage, holiday pay and rest breaks at a stroke: classification determines the statutory wage floor. With roughly 4.4 million estimated UK gig workers and algorithmic management replacing the human relationship through which wages are normally negotiated, insecurity also feeds back into immobility, since workers without sick pay cannot afford time out to retrain.

Building the paragraph

Here is the migration chain as a full KAA paragraph, built on the construction case. The topic sentence carries mechanism, direction and headline evidence together:

Ending EU free movement in January 2021 shifted labour supply left in the UK's skilled trades and exposed the occupational immobility it had masked: real wages for electricians, plumbers and gas engineers rose 25 to 35% by 2024 while around 40,000 vacancies went unfilled.

1. Under free movement, EU-trained tradespeople, about 8% of the construction workforce and up to 30% in some trades, formed an elastic buffer of supply that answered any wage rise quickly.
2. Removing free movement withdrew that buffer, shifting labour supply left and leaving only the domestic supply curve, made inelastic by the four to five year apprenticeship pipeline.
3. Diagram step: draw a steep domestic supply curve with demand rising post-pandemic; the leftward supply shift and rightward demand shift together produce a large wage rise and a small employment change.
4. The prediction fits the data: 25 to 35% real wage gains in the trades over 2021 to 2024, with roughly 40,000 vacancies in 2023, because the qualification barrier blocked entry at any wage.
5. Apply the counterfactual test: if EU workers had been substitutes for domestic workers, their removal would have raised domestic employment; instead vacancies and prices rose, so they were complements and the immobility was always there.
6. The consequence is an output constraint, with housing completions of around 232,000 in 2022–23 against a 300,000 target and construction costs up about 30% over 2021–23; the lost output during the training lag is never recovered.

Key terms

Term	Precise definition	Where it earns marks
Wage differential	A persistent difference in pay between occupations, sectors or groups of workers.	Frame it as a composite of MRP, compensating, institutional and power-based causes.
Compensating differential	A wage premium for undesirable job characteristics, or a wage discount for attractive ones.	Evaluation gold: where a predicted premium is absent, infer employer wage-setting power.
Occupational immobility	Workers unable to move between occupations because skills and qualifications are occupation-specific.	Pairs with the inelastic supply diagram; explains why differentials persist (AO3).
Geographical immobility	Workers unable or unwilling to move between areas in response to wage differentials.	Housing cost and family tie evidence turns a list into analysis.
Substitutes and complements (migration)	Migrant workers either compete for the same jobs as domestic workers or fill roles domestic workers cannot.	The analytical spine of any migration answer; the post-Brexit counterfactual tests which applies.
Employment classification	The legal status (employee, worker, self-employed) that determines which protections and wage floors apply.	The Uber ruling point: reclassification changes the statutory floor without new legislation.