Maybe the chip reacted differently in season 7 as Spike was different in season 7, it could have classed him as being more human, with a soul, and decreased the pain level because of it. I have no idea I'm making this up as I go! 😛
It also suggests that vampires have a choice in whether or not to be evil. Spike stopped being evil and even when he had an opportunity to return to his chipless ways he rejected it.Since the conversation derailed from continuity errors to the chip as a plot device, I say that it was very clever. It helped Spike - a soulless vampire - evolve, and, aside some glitches, it was perfectly credible, in all its phases, including when it stopped working on Buffy, and when it was removed by Riley's people.