IGCSE Economics 0455: Wage Differentials. Sector and Discrimination

Dr Nabila works full-time as a dentist at a government-run public health clinic, earning $26.00 per hour. Dr Owusu works full-time as a dentist at a private dental practice in the same city, earning $34.00 per hour. At that same private practice, Dr Farrow, who has identical qualifications and experience to Dr Owusu and treats a similar number of patients each week, is paid only $29.00 per hour.

(a) Identify two reasons, illustrated in the scenario, why the hourly pay of these three equally qualified dentists differs. [2]

(b) Explain how the difference between working in the public sector and working in the private sector could account for the gap between Dr Nabila's and Dr Owusu's hourly pay. [3]

Part (a): Two reasons for the pay differences

Two distinct reasons are illustrated in the scenario:

Sector of employment: Dr Nabila works in the public sector while Dr Owusu and Dr Farrow work in the private sector, and this alone accounts for part of the gap between Dr Nabila’s pay and theirs.
Discrimination: Dr Owusu and Dr Farrow work at the same private practice, with identical qualifications, experience and caseloads, yet Dr Farrow is paid less, a gap that cannot be explained by any productivity-related factor.

Part (b): Explaining the public/private sector gap

Dr Nabila’s pay is set within a public-sector pay structure: public clinics are funded out of government spending (ultimately from taxation), and pay rates are usually determined by government-wide pay scales that apply across many public clinics, rather than by the specific market conditions for dentists in one city.

Dr Owusu’s private practice, by contrast, earns its revenue directly from fees paid by patients. It is not bound by a government pay scale, so it can set pay according to what it can afford and what is necessary to attract and keep skilled dentists in a competitive local market. Where demand for private dental care is strong, this can allow private practices to pay more than the equivalent public-sector rate, which is exactly the pattern seen between Dr Nabila and Dr Owusu.

Part (c): Why the Owusu–Farrow gap cannot be justified economically

Economically, differences in pay between workers are normally justified by differences in their contribution to output. For example, differences in qualifications, experience, skill or how much work they do. Dr Owusu and Dr Farrow have:

Identical qualifications
Identical experience
Similar patient caseloads

Since there is no difference between them in any of the factors that would normally explain a pay gap, there is no economic basis for Dr Owusu being paid $34.00 per hour while Dr Farrow is paid only $29.00 per hour for doing the same job to the same standard. The gap instead reflects discrimination, unequal pay for workers of equal productivity, which is an inefficient and unfair outcome rather than one that reflects genuine differences in the value of what each dentist contributes.

Final answers

(a) Sector of employment (public vs private) explains Dr Nabila’s gap with the other two; discrimination explains the gap between the equally qualified Dr Owusu and Dr Farrow.
(b) Public-sector pay follows government-wide pay scales funded from taxation, while the private practice sets pay from patient fees to compete for dentists locally, which can result in higher private-sector pay.
(c) Dr Owusu and Dr Farrow are identical in qualifications, experience and caseload, so there is no productivity-based reason for their pay gap, it reflects discrimination, not economic factors.