KENYA |N8T|TUTE 0F HANACEHENT

NAHE: L0RNA AT|EN0 0KAT6h

A0H|N0: NR|4825

60UR8E: LA0R E60N0H|68

600E: 06H 202

TA8K: h0HE A8E0 A88|ChNHENT.

LE6TURER: HR.0RE8|


















WACL
Wage lncludes all forms of remuneraLlon for all human producLlve acLlvlLles uslng ones skllls 1hus wage ls Lhe
comblnaLlon of salary bonus and oLher forms of compensaLlon Wage ls pald for work as varlous as LhaL of a
bluecollar mechanlc as well as LhaL of a lawyer 1he dollar amounL recelved ls referred Lo as nomlnal wage 1he
purchaslng power of amounL recelved work ls real wage
ln economlcs wage ls a general Lerm lor lnsLance Lhe work performed by a medlcal docLor may resulL ln a fee and
varlous oLher names are used for dlfferenL professlons lor economlsLs Lhe dlfferenL Lypes of work do noL maLLer lL
ls all labor and Lhe prlce or paymenL ls wage
8LAL WACL
1he shllllngs amounL recelved for an hours work ls referred Lo as nomlnal wage 8eal wage ls Lhe nomlnal wage
ad[usLed for lnflaLlon lL ls calculaLed by dlvldlng Lhe shllllng amounL by one plus Lhe raLe of lnflaLlon 1he raLe of
change ln unlL labor cosL ls equal Lo Lhe raLe of change ln real wage less Lhe raLe of change ln producLlvlLy 1hus unlL
labor cosL does noL lncrease as long as Lhe raLe of growLh of real wage ls [usL equal Lo Lhe growLh of producLlvlLy
WhaL a salary can buy ln Lerms of varlous goods and servlces ls real wage lL ls only used as a comparlson Lo some
prlor Llme perlod 1he consumer prlce lndex ls ofLen used as Lhe raLe of lnflaLlon
1nLCkILS CI WAGLS
kes|dua|c|a|mant theory
lL holds LhaL afLer all oLher facLors of producLlon have recelved Lhelr share of Lhe producL Lhe amounL lefL goes Lo
Lhe remalnlng facLor Some scholars sald LhaL renL would be deducLed flrsL and proflLs nexL lrancls A Walker ln
1873 worked ouL a resldual Lheory of wages ln whlch Lhe shares of Lhe landlord caplLallsL and enLrepreneur were
deLermlned lndependenLly and subLracLed Lhus leavlng Lhe remalnder for labour ln Lhe form of wages lL should be
noLed however LhaL any of Lhe facLors of producLlon may be selecLed as Lhe resldual clalmanL assumlng LhaL
lndependenL deLermlnaLlons may be made for Lhe shares of Lhe oLher facLors lL ls doubLful Lherefore LhaL such a
Lheory has much value as an explanaLlon of wage phenomena
8arga|n|ng theory
lL holds LhaL wages hours and worklng condlLlons are deLermlned by Lhe relaLlve bargalnlng sLrengLh of Lhe parLles
Lo Lhe agreemenL lL was noLed LhaL employers had greaLer bargalnlng sLrengLh Lhan employees because lL was
easler for employers Lo comblne ln opposlLlon Lo employees demands and also because employers were flnanclally
able Lo wlLhsLand Lhe loss of lncome for a longer perlod Lhan Lhe employees 1hls ldea was developed Lo a
conslderable exLenL by !ohn uavldson who argued ln 1898 LhaL Lhe deLermlnaLlon of wages ls an exLremely
compllcaLed process lnvolvlng numerous lnfluences LhaL lnLeracL Lo esLabllsh Lhe relaLlve bargalnlng sLrengLh of Lhe
parLles 1here ls no one facLor or slngle comblnaLlon of facLors LhaL deLermlnes wages and Lhere ls no one raLe LhaL
necessarlly prevalls 8ecause Lhere are many posslblllLles Lhere ls a range of raLes wlLhln whlch any number of raLes
may exlsL slmulLaneously 1he upper llmlL of Lhe range ls seL by Lhe raLe beyond whlch Lhe employer refuses Lo hlre
cerLaln workers 1hls raLe ls lnfluenced by such conslderaLlons as Lhe producLlvlLy of Lhe workers Lhe compeLlLlve
slLuaLlon Lhe slze of Lhe lnvesLmenL and Lhe employers esLlmaLe of fuLure buslness condlLlons 1he lower llmlL of
Lhe range ls seL by Lhe raLe below whlch Lhe workers wlll noL offer Lhelr servlces Lo Lhe employer 1hls raLe ls
lnfluenced by such conslderaLlons as mlnlmum wage leglslaLlon Lhe workers sLandard of llvlng Lhelr appralsal of
Lhe employmenL slLuaLlon and Lhelr knowledge of raLes pald Lo oLhers
nelLher Lhe upper nor Lhe lower llmlL ls flxed and elLher may move upward or downward 1he raLe or raLes wlLhln
Lhe range are deLermlned by relaLlve bargalnlng power
1he bargalnlng Lheory ls very aLLracLlve Lo labour organlzaLlons for conLrary Lo Lhe subslsLence and wagesfund
Lheorles lL provldes a very cogenL reason for Lhe exlsLence of unlons 1he bargalnlng sLrengLh of a unlon ls much
greaLer Lhan LhaL of Lhe members acLlng as lndlvlduals Also Lhere are slLuaLlons (bllaLeral monopoly for lnsLance)
under whlch LheoreLlcal analysls arrlves aL a range of wage raLes raLher Lhan a deLermlnaLe raLe 1he acLual raLe
musL depend upon relaLlve bargalnlng power lL should be observed however LhaL hlsLorlcally labour was able
Lo lmprove lLs slLuaLlon before lLs bargalnlng power became more effecLlve Lhrough organlzaLlon lacLors oLher Lhan
Lhe relaLlve bargalnlng sLrengLh of Lhe parLles musL have been aL work 1he bargalnlng Lheory ofLen glves an
excellenL explanaLlon of a shorLrun slLuaLlon such as Lhe exlsLence of cerLaln wage dlfferenLlals buL over Lhe long
run lL falls Lo provlde an adequaLe undersLandlng of Lhe changes LhaL have Laken place ln Lhe average level of wages

,arg|na|product|v|ty theory and |ts cr|t|cs
1oward Lhe end of Lhe 19
Lh
cenLury marglnalproducLlvlLy analysls was applled noL only Lo labour buL Lo oLher
facLors of producLlon as well lL was noL a new ldea as an explanaLlon of wage phenomena lL was observed LhaL a
relaLlonshlp exlsLed beLween wage raLes and Lhe producLlvlLy of labour and !ohann Pelnrlch von 1hunen a Cerman
economlsL had worked ouL a marglnalproducLlvlLy Lype of analysls for wages ln 1826 1he AusLrlan economlsLs
made lmporLanL conLrlbuLlons Lo Lhe marglnal ldea afLer 1870 and bulldlng on Lhese grounds a number of
economlsLs ln Lhe 1890s lncludlng hlllp Penry WlcksLeed ln Lngland and !ohn 8aLes Clark ln Lhe unlLed SLaLes
elaboraLed Lhe ldea lnLo Lhe marglnalproducLlvlLy Lheory of dlsLrlbuLlon lL ls llkely LhaL Lhe dlsLurblng concluslons
drawn by Marx from classlcal economlc Lheory lnsplred Lhls developmenL ln Lhe early 1930s reflnemenLs Lo Lhe
marglnalproducLlvlLy analysls parLlcularly ln Lhe area of monopollsLlc compeLlLlon were made by !oan 8oblnson ln
Lngland and Ldward P Chamberlln ln Lhe unlLed SLaLes As applled Lo wages Lhe marglnalproducLlvlLy Lheory
holds LhaL employers wlll Lend Lo hlre workers of a parLlcular Lype unLll Lhe addlLlon made by Lhe lasL (marglnal)
worker Lo Lhe LoLal value of Lhe producL ls equal Lo Lhe addlLlon Lo LoLal cosL caused by Lhe hlrlng of one more
worker 1he wage raLe ls esLabllshed ln Lhe markeL Lhrough Lhe demand for and supply of Lhe Lype of labour and
Lhe operaLlon of compeLlLlon assures Lhe workers LhaL Lhey wlll recelve a wage equal Lo Lhe marglnal producL
under Lhe law of dlmlnlshlng marglnal producLlvlLy Lhe conLrlbuLlon of each addlLlonal worker ls less Lhan LhaL of
hls predecessor buL workers of a parLlcular Lype are assumed Lo be allke maklng Lhem lnLerchangeable and
anyone could be consldered Lhe marglnal worker All recelve Lhe same wage and Lherefore by hlrlng Lo Lhe
margln Lhe employer maxlmlzes hls proflLs As long as each addlLlonal worker conLrlbuLes more Lo LoLal value Lhan
he cosLs ln wages lL pays Lhe employer Lo conLlnue hlrlng 8eyond Lhe margln addlLlonal workers would cosL more
Lhan Lhelr conLrlbuLlon and would subLracL from aLLalnable proflLs 1he Lheory also provldes an explanaLlon of wage
dlfferenLlals Wage dlfferenLlals are caused by dlfferences ln marglnal producL

1he wages of skllled workers are hlgher Lhan Lhose of unskllled workers because Lhere are fewer skllled workers
and Lhelr marglnal producL Lherefore ls hlgher 1he marglnalproducLlvlLy Lheory of wages became Lhe prevalllng
wage Lheory and alLhough lL has been aLLacked by many and dlscarded by some no accepLable alLernaLlve has
been devlsed 1he chlef basls for crlLlclsm of Lhe Lheory ls LhaL lL resLs on unreallsLlc assumpLlons such as Lhe
exlsLence of homogenous groups of workers whose knowledge of Lhe labour markeL ls so compleLe LhaL Lhey wlll
always move Lo Lhe besL [ob opporLunlLles Workers are ln facL noL homogenous usually Lhey have llLLle
knowledge of Lhe labour markeL and because of home Lles senlorlLy and oLher conslderaLlons Lhey do noL ofLen
move qulckly from one [ob Lo anoLher 1he assumpLlon LhaL employers are able Lo measure producLlvlLy accuraLely
and compeLe freely ln Lhe labour markeL also ls farfeLched Lven Lhe assumpLlon LhaL all employers aLLempL Lo
maxlmlze proflLs may be doubLed 1he proflL moLlve does noL affecL charlLable lnsLlLuLlons or governmenL agencles
lor Lhe Lheory Lo operaLe properly labour and caplLal musL be fully employed so LhaL lncreased producLlon can be
secured only aL lncreased cosL caplLal and labour musL be easlly subsLlLuLable for each oLher and Lhe slLuaLlon
musL be compleLely compeLlLlve Cbvlously Lhese assumpLlons do noL flL Lhe real world and some crlLlcs feel LhaL
Lhe resulLs of Lhe Lheory are so mlsleadlng LhaL Lhe Lheory should be abandoned 1he proponenLs argue however
LhaL producLlvlLy glves a rough approxlmaLlon of wages and LhaL alLhough producLlvlLy may noL provlde Lhe
lmmedlaLe explanaLlon ln a parLlcular case lL cerLalnly lndlcaLes longrun Lrends 1he Lheory Lherefore has
lmporLanL uses and lf Lhe dlfflculLles are kepL ln mlnd lL can be a valuable Lool

ln a modern economy monopollsLlc or near monopollsLlc condlLlons exlsL ln some lmporLanL areas parLlcularly
where Lhere are only a few large producers (such as ln Lhe auLomoblle lndusLry) on one slde of Lhe bargalnlng Lable
and powerful labour organlzaLlons on Lhe oLher under such clrcumsLances Lhe marglnal producLlvlLy analysls
cannoL deLermlne wages preclsely lL can show only Lhe poslLlons LhaL Lhe unlon (as a monopollsL of labour supply)
and Lhe employer (as a monopsonlsL or slngle purchaser of labour servlces) wlll sLrlve Lo reach dependlng upon
Lhelr currenL pollcles

9urchas|ngpower theory
lL lnvolves Lhe relaLlon beLween wages and employmenL and ls noL Lherefore a Lheory of wage deLermlnaLlon lL
sLresses Lhe lmporLance of spendlng Lhrough consumpLlon and lnvesLmenL as an lnfluence upon Lhe acLlvlLy of Lhe
economy 1he Lheory galned promlnence durlng Lhe CreaL uepresslon of Lhe 1930s when lL became apparenL LhaL
lowerlng wages mlghL noL lncrease employmenL as prevlously had been assumed !ohn Maynard keynes Lhe 8rlLlsh
economlsL malnLalned ln hls 1heory of LmploymenL lnLeresL and Money/ (1936) LhaL (1) depresslonal
unemploymenL could noL be explalned merely by frlcLlons ln Lhe labour markeL LhaL lnLerrupLed Lhe smooLh
movemenL of Lhe economy Loward full employmenL equlllbrlum and (2) Lhe assumpLlon LhaL all oLher Lhlngs
remalned equal presenLed a speclal case LhaL had no real appllcablllLy Lo Lhe exlsLlng slLuaLlon keynes relaLed
changes ln employmenL Lo changes ln consumpLlon and lnvesLmenL and he polnLed ouL LhaL sLable equlllbrlum
could exlsL wlLh less Lhan full employmenL

8ecause wages make up such a large percenLage of Lhe naLlonal lncome changes ln wages usually have an
lmporLanL effecL upon consumpLlon lL ls posslble LhaL lowerlng wages wlll reduce consumpLlon and LhaL wlLh Lhe
decllne ln demand for goods and servlces Lhe demand for labour may also fall Lhus decreaslng employmenL raLher
Lhan lmprovlng lL WheLher Lhls wlll be Lhe resulL however depends upon several conslderaLlons parLlcularly Lhe
reacLlon upon prlces lf wages fall more rapldly Lhan prlces labours real wages wlll be drasLlcally reduced and
consumpLlon wlll fall accompanled by lncreased unemploymenL unless LoLal spendlng ls malnLalned by lncreased
lnvesLmenL LnLrepreneurs may look upon Lhe lower wage cosLs ln relaLlon Lo prlces as an encouraglng slgn Loward
greaLer proflLs ln whlch case Lhey may lncrease Lhelr lnvesLmenLs and employ more people aL Lhe lower raLes Lhus
malnLalnlng or even lncreaslng LoLal spendlng and employmenL lf employers look upon Lhe falllng wages and prlces
as an lndlcaLlon of furLher decllnes however Lhey may conLracL Lhelr lnvesLmenLs or do no more Lhan malnLaln
Lhem ln Lhls case LoLal spendlng and employmenL wlll decllne lf wages fall less rapldly Lhan prlces labours real
wages wlll lncrease and consumpLlon may rlse lf lnvesLmenL ls aL leasL malnLalned LoLal spendlng ln Lerms of
consLanL dollars wlll lncrease Lhus lmprovlng employmenL lf enLrepreneurs look upon Lhe shrlnklng proflL margln
as a danger slgnal however Lhey may reduce Lhelr lnvesLmenLs and lf Lhe resulL ls a reducLlon ln LoLal spendlng
employmenL wlll fall lf wages and prlces fall Lhe same amounL Lhere should be no change ln consumpLlon and
lnvesLmenL and ln LhaL case employmenL wlll remaln unchanged 1he purchaslngpower Lheory lnvolves
psychologlcal conslderaLlons as well as Lhose LhaL may be measured more ob[ecLlvely WheLher lL can be used
effecLlvely Lo conLrol Lhe buslness cycle depends upon pollLlcal as well as economlc facLors because governmenL
expendlLures are a parL of LoLal spendlng Laxes may affecL prlvaLe spendlng eLc 1he appllcablllLy of Lhe Lheory ls Lo
Lhe whole economy raLher Lhan Lo Lhe lndlvldual flrm
C|ass|ca| theor|es
1heorles of wage deLermlnaLlon and Lhe share of labour ln Lhe gross naLlonal producL have varled from Llme Lo Llme
and have changed as Lhe economlc envlronmenL has changed 1he body of LhoughL referred Lo Loday
as wage Lheorles could noL have emerged unLll Lhe old feudal sysLem had dlsappeared and Lhe modern economy
wlLh lLs modern lnsLlLuLlons had come lnLo exlsLence Adam SmlLh ln 1he WealLh of naLlons/ (1776) falled Lo
propose a deflnlLlve Lheory of wages buL he anLlclpaLed several Lheorles LhaL were developed by oLhers laLer SmlLh
LhoughL LhaL wages were deLermlned ln Lhe markeLplace Lhrough Lhe law of supply and demand Workers and
employers would naLurally follow Lhelr own selflnLeresL labour would be aLLracLed Lo Lhe [obs where labour was
needed mosL and Lhe resulL would be Lhe greaLesL overall beneflL Lo Lhe workers and Lo socleLy 8uL SmlLh gave no
preclse analysls of Lhe supply of and demand for labour he dlscussed many elemenLs LhaL were lnvolved buL dld noL
weave Lhem lnLo a conslsLenL LheoreLlcal paLLern

Subs|stence theory
lL emphaslzes Lhe supply aspecLs and neglecLs Lhe demand aspecLs of Lhe labour markeL 1hey hold LhaL change ln
Lhe supply of workers ls Lhe baslc force LhaL drlves real wages Lo Lhe mlnlmum requlred for subslsLence LlemenLs of
a subslsLence Lheory appear ln '1he WealLh of naLlons' where Lhe wages pald Lo workers had Lo be enough Lo allow
Lhem Lo llve and Lo reproduce Lhemselves SmlLh was more opLlmlsLlc however Lhan Lhe 8rlLlsh
classlcal economlsLs such as uavld 8lcardo and 1homas MalLhus who followed hlm for he lmplled LhaLaL leasL ln
an advanclng naLlonLhe wage level would have Lo be above subslsLence Lo permlL Lhe populaLlon Lo grow enough
Lo supply Lhe addlLlonal workers needed 8lcardo malnLalned a more rlgld vlew Pe wroLe LhaL Lhe naLural prlce of
labour was Lhe prlce necessary Lo enable Lhe labourers Lo subslsL and Lo perpeLuaLe Lhe race wlLhouL lncrease or
dlmlnuLlon 8lcardos sLaLemenL was conslsLenL wlLh Lhe MalLhuslan Lheory of populaLlon whlch held LhaL
populaLlon ad[usLs Lo Lhe means of supporLlng lL 1he markeL prlce of labour could noL vary from Lhe naLural prlce
for long lf wages rose above subslsLence Lhe number of workers would lncrease and brlng Lhe wage raLes down lf
wages fell below subslsLence Lhe number of workers would decrease and brlng Lhe wage raLes up AL Lhe Llme LhaL
Lhese economlsLs wroLe mosL workers were acLually llvlng near Lhe subslsLence level and populaLlon appeared Lo
be Lrylng Lo ouLrun Lhe means of subslsLence 1he subslsLence Lheory seemed Lo flL Lhe facLs and alLhough 8lcardo
sald LhaL Lhe naLural prlce of labour was noL flxed and mlghL be changed lf cusLom and hablL moderaLed populaLlon
lncreases ln relaLlon Lo food supply and oLher lLems necessary Lo malnLaln labour laLer wrlLers Lended Lo subscrlbe
Lo Lhe baslc ldea and noL Lo admlL excepLlons 1helr lnflexlble and lnevlLable concluslon earned Lhe Lheory Lhe name
lron law of wages

Wagesfund theory
1he demand for labour could noL lncrease excepL ln proporLlon Lo Lhe lncrease of Lhe funds desLlned for Lhe
paymenL of wages 8lcardo malnLalned LhaL an lncrease ln caplLal would resulL ln an lncrease ln demand for labour
SLaLemenLs such as Lhese foreshadowed Lhe wagesfund Lheory whlch held LhaL a predeLermlned fund of wealLh
exlsLed for Lhe paymenL of wages 1he slze of Lhe fund could be changed over perlods of Llme buL aL any glven
momenL Lhe amounL was flxed and Lhe average wage could be deLermlned slmply by dlvldlng Lhe fund by Lhe
number of workers SmlLh LhoughL of Lhe fund as surplus lncome of wealLhy menbeyond Lhe needs of Lhelr
famllles and Lradewhlch Lhey would use Lo employ oLhers 8lcardo LhoughL of lL ln Lerms of caplLalfood cloLhlng
Lools raw maLerlals machlnery eLc necessary Lo glve effecL Lo labour 8egardless of Lhe makeup of Lhe fund Lhe
obvlous concluslon was LhaL when Lhe fund was large ln relaLlon Lo Lhe number of workers wages would be hlgh
When lL was relaLlvely small wages would be low lf populaLlon lncreased Loo rapldly ln relaLlon Lo food and oLher
necesslLles (as ouLllned by MalLhus) wages would be drlven Lo Lhe subslsLence level 1herefore lL would be Lo Lhe
advanLage of labour Lo help promoLe Lhe accumulaLlon of caplLal Lo enlarge Lhe fund raLher Lhan Lo dlscourage lL by
formlng labour organlzaLlons and maklng exorblLanL demands Also lL followed LhaL leglslaLlon deslgned Lo ralse
wages would noL be successful for wlLh only a flxed fund Lo draw upon lncreases galned by some workers could be
malnLalned only aL Lhe expense of oLhers
1hls Lheory was generally accepLed for 30 years by economlsLs lncludlng such wellknown flgures as nassau Wllllam
Senlor and !ohn SLuarL Mlll W1 1hornLon lu Longe and lrancls A Walker were largely responslble for
dlscredlLlng Lhe Lheory durlng Lhe decade followlng 1863 1hey polnLed ouL LhaL Lhe demand for labour was noL
deLermlned by a fund buL was derlved from Lhe consumer demand for producLs 1he proponenLs of Lhe wagesfund
docLrlne had been unable Lo prove LhaL Lhere was a deLermlnaLe wage fund or any fund malnLalnlng a
predeLermlned relaLlonshlp wlLh caplLal or wlLh Lhe porLlon of Lhe proceeds of labours producL pald ouL ln wages
AcLually Lhe amounL pald ouL depended upon a number of facLors lncludlng Lhe bargalnlng power of labour ?eL ln
splLe of Lhese Lelllng crlLlclsms Lhe wagesfund Lheory conLlnued Lo exerclse an lmporLanL lnfluence unLll Lhe end of
Lhe 19
Lh
cenLury

,arx|an surp|usva|ue theory
karl accepLed 8lcardos labour Lheory of value buL he subscrlbed Lo a subslsLence Lheory of wages for
a dlfferenL reason Lhan LhaL glven by Lhe classlcal economlsLs ln Marxs mlnd lL was noL Lhe pressure of populaLlon
LhaL drove wages Lo Lhe subslsLence level buL raLher Lhe exlsLence of a large army of unemployed whlch he blamed
on Lhe caplLallsLs Pe sLaLed LhaL Lhe exchange value of any producL was deLermlned by Lhe amounL of labour Llme
soclally necessary Lo creaLe lL Pe held LhaL under Lhe caplLallsLlc sysLem labour was merely a commodlLy and could
geL only lLs subslsLence 1he caplLallsL however could force Lhe worker Lo spend more Llme on hls [ob Lhan was
necessary Lo earn hls subslsLence and Lhe excess producL or surplus value Lhus creaLed was Laken by Lhe
caplLallsL lrom Lhe polnL of vlew of classlcal Lheory Marxs argumenL appeared persuaslve alLhough Lhe Lerm
labour Llme soclally necessary hld some serlous ob[ecLlons 1he faLal blow came when Lhe labour Lheory of value
and Marxs subslsLence Lheory of wages were found Lo be lnvalld WlLhouL Lhem Lhe surplusvalue Lheory collapsed

1nL WAGL DL1Lk,INAN1S
numerous forces operaLe as wage deLermlnanLs 1hese mlghL be roughly classlfled as economlc lnsLlLuLlonal
behavloral and equlLy conslderaLlons Wage declslons appear Lo be made by comparlson Lo labor markeLs so many
of Lhe deLermlnanLs appear Lo be economlc 8oLh Lhe meanlng and force of economlc varlables are lnLerpreLed by
organlzaLlon declslon makers and Lhese deLermlnanLs are Lempered by lnsLlLuLlonal behavloral and eLhlcal
varlables 1here ls no doubL LhaL wage deLermlnanLs operaLe Lhrough labor markeLs and LhaL Lhey lnclude economlc
forces More proflLable organlzaLlons Lend Lo pay hlgher wages for Lhe same occupaLlons Lhan less proflLable
organlzaLlons CaplLallnLenslve organlzaLlons Lend Lo be more proflLable because addlLlonal caplLal usually
lncreases producLlvlLy Small organlzaLlons Lend Lo pay lower wages ofLen because Lhose wages are all Lhey can
afford Servlce lndusLrles LhaL Lend Lo be laborlnLenslve lowproflL and lowwage are ofLen composed of small
organlzaLlons
Local labor markeLs vary ln wage levels dependlng on lndusLrlal composlLlon CommunlLles ln whlch a large
proporLlon of organlzaLlons are ln hlghproflL lndusLrles Lend Lo be hlghwage communlLles and ofLen have a hlgher
cosL of llvlng CommunlLles wlLh a hlgh proporLlon of organlzaLlons ln lowproflL lndusLrles Lend Lo be lowwage
SomeLlmes communlLles experlence shorLrun lncreases ln wage levels because labor demand lncreases compared
Lo labor supply or Lhere ls a decrease ln wage levels because of an lncrease ln labor supply wlLhouL a proporLlonal
lncrease ln demand ulfferenLlals among local labor markeLs are llmlLed by a Lendency for workers Lo leave low
wage communlLles and for organlzaLlons Lo locaLe new planLs ln lowwage areas unlons someLlmes aLLempL Lo
ellmlnaLe dlfferenLlals by maklng a concesslon ln work rules affecLlng producLlvlLy Wage levels Lend Lo lncrease
fasLer ln good Llmes proflLs lncrease and Lhls encourages workers Lo become more demandlng and moblle unlons
relnforce Lhls Lendency by lnslsLlng on uslng galns made elsewhere Lo make Lhelr comparlsons Some less efflclenL
organlzaLlons survlve by paylng less and lowerlng sLandards of employablllLy even ln good Llmes Plgh proflLs good
Llmes and lncreaslng producLlvlLy Lend Lo lncrease an organlzaLlons wagepaylng ablllLy buL organlzaLlons may or
may noL be wllllng Lo pay hlgher wages Some of Lhem do so Lo slmpllfy recrulLlng problems and Lo foresLall
Lurnover CLhers do so because aboveaverage proflLs wheL Lhe appeLlLes of workers and Lhelr unlons MosL
organlzaLlons Lend Lo adopL a poslLlon ln Lhe wage sLrucLure of Lhe communlLy and aLLempL Lo malnLaln LhaL
poslLlon 1hus economlc forces operaLe on wage declslons Lhrough Lhe acLlons of declslon makers lf declslon
makers belleve LhaL ad[usLmenLs ln wages are necessary or deslrable on economlc or oLher grounds Lhey make
Lhem lf Lhey belleve LhaL Lhe organlzaLlons presenL wagepaylng poslLlon ls prudenL and accepLable Lhey do noL
Wage level deLermlnanLs may be classlfled on Lhe basls of
(1) Lmployer ablllLy Lo pay
(2) Lmployer wllllngness Lo ay
(3) Lmployee (or poLenLlal employee) accepLance
AlLhough some of Lhese conslderaLlons have been used by arblLraLors and wage boards llLLle ls known abouL how
Lhey are used by wagepaylng organlzaLlons or unlons lL ls Lherefore Lo emphaslze how and when Lhese
deLermlnanLs could be used by organlzaLlons
% L,9CLk A8II1 1C 9A
When asked mosL organlzaLlons would say LhaL Lhe ma[or deLermlnanL of Lhelr wage level ls whaL Lhe markeL ls
paylng Powever Lhere ls usually a caveaL Lo Lhls and LhaL ls Lhelr sLaLemenL lf we can afford lL So lL would seem
LhaL Lhe wage level of Lhe organlzaLlon ls deLermlned by exLernal forces of Lhe markeL buL LhaL Lhe reallLy of Lhe
organlzaLlons flnanclal poslLlon may modlfy or overrule carrylng ouL Lhls deslre 1hls ls expressed ln surveys LhaL ask
abouL whaL deLermlnes Lhe organlzaLlons wage level When Lhese organlzaLlons say lf Lhey can afford lL Lhey are
lnvoklng Lhe ablllLy Lo pay Powever Lhere ls llLLle LhaL explalns exacLly whaL Lhe ablllLy Lo pay ls As reporLed more
proflLable flrms Lend Lo pay hlgher wages wheLher Lhelr proflLablllLy ls based on Lhe producL markeL Lechnlcal
efflclency managemenL ablllLy slze or some oLher facLor 1he slLuaLlon wlLh Lhe auLomoblle lndusLry ls an example
of whaL can happen when an lndusLry LhaL ls hlghly proflLable falls on bad Llmes and lLs wage level musL fall ln order
Lo survlve 1hls has been parLlcularly hard slnce Lhe lndusLry ls hlghly unlonlzed
ln a very real sense wage deLermlnaLlon by Lhe organlzaLlon ls an assessmenL of lLs ablllLy Lo pay 1he welghL
aLLached Lo oLher wage deLermlnanLs may be deLermlned by Lhls esLlmaLe Wages are labor cosLs Lo employers and
Lhese cosLs are hlgh or low dependlng on whaL Lhe employer geLs for Lhe wage Lhe resulLs of efforL WhaL Lhe
employer acLually pays ls labor cosL per unlL of ouLpuL Lhls ls Lhe wage cosLs dlvlded by Lhese resulLs Lermed
producLlvlLy A prospecLlve wage lncrease may or may noL lncrease labor cosL per unlL dependlng on anLlclpaLed
changes ln producLlvlLy A wage lncrease LhaL would be offseL by lncreases ln producLlvlLy does noL lncrease labor
cosLs and meeLs Lhe requlremenL of ablllLy Lo pay A wage lncrease LhaL lncreases labor cosLs however requlres
deLermlnlng wheLher Lhe lncrease can be passed on Lo cusLomers or offseL by a reducLlon ln oLher cosLs Success ln
elLher efforL agaln meeLs Lhe requlremenLs of ablllLy Lo pay
Slmllarly a unlon presumably aLLempLs Lo esLlmaLe an organlzaLlons ablllLy Lo pay before maklng lLs demands Plgh
currenL proflLs or favorable fuLure prospecLs slgnal ablllLy Lo pay and sLrengLhen Lhe unlons bargalnlng power
unlons have a very long hlsLory and some early unlon conLracLs Lled wages Lo ablllLy Lo pay lor example a 1919
prlnLlng agreemenL Lled wages Lo economlc condlLlons ln Lhe lndusLry ConLracLs coverlng moLlon plcLure operaLors
have based wages on Lhe seaLlng capaclLy of LheaLers Coal lndusLry agreemenLs have Lled wages Lo Lhe producLlvlLy
of coal flelds Slldlngscale agreemenLs have geared wages Lo selllng prlces 8oLh Lhe unlLed SLeelworkers and Lhe
unlLed AuLo Workers aLLempLed (unsuccessfully) Lo secure agreemenLs Lylng prospecLlve wage lncreases ln Lhelr
lndusLrles Lo company proflLs lL ls noL llkely Loday LhaL Lhls would be seen by Lhe workers as a good bargaln
AlLhough employers profess Lo use ablllLy Lo pay (or lnablllLy Lo pay) as a wage deLermlnanL llLLle ls known abouL
how Lhey measure lL An early sLudy found a number of organlzaLlons LhaL esLlmaLed ablllLy Lo pay by lnserLlng a
pro[ecLed wage lncrease lnLo Lhe laLesL lncome sLaLemenL 1he ablllLy of a flrm Lo pay a glven level of wages or Lo
fund a wage lncrease whlle remalnlng proflLable CrganlzaLlons probably reacL Lo Lhe ablllLy Lo pay when Lhey
percelve Lhelr ablllLy ls ln danger LxecuLlves are more llkely Lo brlng Lhe ablllLy Lo pay up ln wage dlscusslons Lhan
are compensaLlon experLs lurLher lowerlng wages and oLher meLhods of reduclng cosLs are more llkely Lo be
percelved as falr ln bad economlc Llmes
LxacLly how organlzaLlons measure Lhelr ablllLy Lo pay ls someLhlng of a mysLery Powever Lhe way ln whlch
organlzaLlons use wage surveys suggesLs LhaL Lhey do so ln a varleLy of ways CrganlzaLlons ofLen say Lhey use wage
surveys Lo evaluaLe Lhelr ablllLy Lo pay lf by evaluaLe Lhey mean deLermlne Lhls would be somewhaL surprlslng
because surveys would loglcally reflecL wllllngness Lo pay 1hls suggesLs LhaL wllllngness Lo pay ls a more lmporLanL
deLermlnanL for organlzaLlons AcLually ablllLy Lo pay ls a composlLe of Lhe economlc forces faclng a flrm As such lL
lnvolves declslons on how proflLs should be measured agalnsL whaL sLandard (neL worLh or sales) and over whaL
perlod lL also lnvolves deLermlnlng an approprlaLe raLe of reLurn and resolvlng Lhe lssues such as producL
developmenL producL mlx and prlclng pollcy LhaL mosL affecL proflLs 1hese conslderaLlons lllusLraLe LhaL alLhough
employlng organlzaLlons and unlons may clLe ablllLy Lo pay or lnablllLy Lo pay as a prlmary reason for wage
declslons no one suggesLs LhaL lL be used as Lhe sole deLermlnanL Such a sLrlcL appllcaLlon of ablllLy Lo pay could
lead Lo very undeslrable resulLs lL would for example compleLely dlsorganlze wage relaLlonshlps Wage levels
would bear no relaLlonshlp Lo Lhe golng raLe ln Lhe labor markeL CrganlzaLlons ln Lhe same lndusLry could have
vasLly dlfferenL wage levels Wages would flucLuaLe wldely along wlLh proflLs Any semblance of lndusLry wage
unlformlLy (usually sLrongly deslred by unlons) would dlsappear LowproflL flrms employlng a hlgh proporLlon of
hlghly skllled people could have lower wage levels Lhan hlghproflL flrms employlng only unskllled labor ln Lhls way
unskllled labor could recelve hlgher wages Lhan hlghly skllled labor SLrong llmlLs moreover would be placed on
economlc efflclency under a sysLem whereln lncreases ln proflLs are absorbed by wages an efflclenL managemenL
would have noLhlng Lo galn from lncreased efforL and lnefflclenL managemenL would be subsldlzed by low wages ln
addlLlon employees could noL leave lnefflclenL organlzaLlons for more efflclenL ones because expanslon of ouLpuL
and employmenL ln efflclenL flrms would be foresLalled by Lhe paylng ouL of lncreased proflLs ln wages Lo presenL
employees lncenLlves for managemenL Lo lmprove efflclency would be serlously lmpalred osslblllLles of expanslon
would be llmlLed
lor Lhese reasons sLrlcL appllcaLlon of ablllLy Lo pay ls llkely Lo hold llLLle aLLracLlon for Lhe parLles Cn Lhe oLher
hand Lhe general economlc envlronmenL of Lhe economy Lhe lndusLry and Lhe flrm ls lmporLanL ln wage
deLermlnaLlon When Lhe demand for Lhe producL or servlce of an organlzaLlon ls sLrong when poLenLlal employees
are relaLlvely scarce and when prlces can be lncreased wlLhouL reducLlon ln sales unlons are llkely Lo polnL Lo
ablllLy Lo pay placlng managemenL ln a poor poslLlon Lo plead lnablllLy Lo pay When economlc condlLlons faclng Lhe
lndusLry or especlally Lhe organlzaLlon are unfavorable managemenL esLlmaLes of lnablllLy Lo pay may seL a low
llmlL Lo wage lncreases unlon reacLlons Lo slLuaLlons ln whlch a company faces flnanclal hardshlp are pragmaLlc
alLhough Lhey are sLrongly opposed Lo subsldlzlng lnefflclenL organlzaLlons Whlle organlzaLlons reporL uslng ablllLy
Lo pay as a wage deLermlnanL ln collecLlve bargalnlng such use ls sub[ecL Lo sLrongly held oplnlons MosL unlon
leaders conslder ablllLy Lo pay as lrrelevanL unless hlgh proflLs are apparenL MosL employers conslder lL no buslness
of Lhe unlon 1he force of ablllLy Lo pay ls probably besL seen aL Lhe exLremes ln [udglng wheLher a wage
ad[usLmenL apparenLly [usLlflable on oLher grounds can or cannoL be meL SLrong evldence of favorable prospecLs
causes employers Lo have less reslsLance Lo prospecLlve lncreases ln wage levels Slmllarly sLrong evldence of
unfavorable prospecLs reduces pressure for a wage lncrease especlally lf lL ls feared LhaL such a wage ad[usLmenL
mlghL cause loss of [obs and greaLly lncreases employer reslsLance
AblllLy Lo pay ls an expresslon of Lhe economlc forces LhaL bear on wage deLermlnaLlon AlLhough lL ls a deLermlnanL
beseL by measuremenL and forecasLlng problems search Lheory suggesLs LhaL organlzaLlons are able Lo esLlmaLe lL
when a declslon calls for lL

roducLlvlLy
roducLlvlLy refers Lo a comparlson beLween Lhe quanLlLy of goods or servlces produced and Lhe quanLlLy of
resources employed ln Lurnlng ouL Lhese goods or servlces lL ls Lhe raLlo of ouLpuL Lo lnpuL 8uL ouLpuL can be
compared wlLh varlous klnds of lnpuLs hours worked Lhe LoLal of labor and caplLal lnpuLs or someLhlng ln beLween
1he resulLs of Lhese dlfferenL comparlsons are dlfferenL as are Lhelr meanlngs dlfferenL comparlsons are
approprlaLe Lo dlfferenL quesLlons 1wo maln concepLs and measuremenLs of producLlvlLy are used buL for dlfferenL
purposes 1he flrsL ouLpuL per hours worked or labor producLlvlLy answers quesLlons concernlng Lhe effecLlveness
of human labor under Lhe varylng clrcumsLances of labor quallLy amounL of equlpmenL sale of ouLpuL meLhods of
producLlon and so on 1he second ouLpuL per unlL of caplLal and labor (LoLal facLor producLlvlLy) measures Lhe
efflclency of labor and caplLal comblned 1hls second measure gauges wheLher efflclency ln Lhe converslon of labor
and caplLal lnLo ouLpuL ls rlslng or falllng as a resulL of changes ln Lechnology slze characLer of economlc
organlzaLlon managemenL skllls and many oLher deLermlnanLs lL ls more complex and more llmlLed ln use
1he flrsL measure ouLpuL per hours worked ls Lhe approprlaLe measure Lo employ ln wage quesLlons lL reflecLs Lhe
comblned effecL of changes (1) ln Lhe efflclency wlLh whlch labor and caplLal are used (2) ln Lhe amounL of Langlble
caplLal employed wlLh each hour of labor and (3) Lhe average quallLy of labor lL ls Lhese Lhree facLors LhaL have
been found Lo besL explaln Lhe longLerm Lrend ln Lhe general level of real wages
lL should be emphaslzed LhaL labor producLlvlLy measures Lhe conLrlbuLlons noL [usL of labor alone buL of all Lhe
lnpuL facLors lnfacL Lhe poLenLlal for esLlmaLlng Lhe conLrlbuLlon of varlous facLors makes measures of labor
producLlvlLy aL varlous levels approprlaLe or lnapproprlaLe for use as wage sLandards
&Cutput per hours worked&
CuLpuL per hours worked can be measured aL Lhe [ob planL lndusLry or economy level AL Lhe [ob level lL ls
posslble Lo measure worker appllcaLlon and efforL separaLely from oLher lnpuLs as Lhe basls for lncenLlve plans
AL Lhe planL level esLlmaLes of Lhe source of producLlvlLy lncreases can be used as Lhe basls of galnsharlng plans
AL Lhe lndusLry level producLlvlLy lmprovemenLs cannoL be Lraced separaLely Lo Lhe behavlor of workers managers
or lnvesLors ln Lhe lndusLry 1he conLrlbuLlons of one lndusLry Lo anoLher lndusLrys producLlvlLy cannoL be
separaLed 1herefore Lhe use of lndusLry producLlvlLy as a wage deLermlnanL would have adverse economlc
consequences lor Lhese reasons lndusLry producLlvlLy ls seldom suggesLed as a wage deLermlnanL

PlsLorlcally aL Lhe level of Lhe economy changes ln labor producLlvlLy have been used as approprlaLe for wage
deLermlnaLlon ln facL Lhe lmprovemenL facLor ln labor conLracLs employed ln Lhe auLomoblle lndusLry from 1948
unLll Lhe early 1980s ls an example of such a use 1hen ln Lhe 1960's wageprlce guldeposLs were based on Lhe
argumenL LhaL wage lncreases ln organlzaLlons should be deLermlned by economywlde advances ln producLlvlLy
Powever Lhls formula use of producLlvlLy for wage deLermlnaLlon has advocaLes and opponenLs AdvocaLes polnL
ouL LhaL lncreaslng wage levels ln speclflc organlzaLlons ln accordance wlLh annual lncreases ln producLlvlLy ln Lhe
economy lnsures LhaL producLlvlLy galns geL dlsLrlbuLed 1hey also argue LhaL dlsLrlbuLlng Lhese galns Lhrough prlce
reducLlons may conLrlbuLe Lo economlc lnsLablllLy
CpponenLs polnL ouL LhaL alLhough Lhere ls a longLerm relaLlonshlp beLween producLlvlLy and wages Lhe shorL
Lerm relaLlonshlp ls hlghly varlable whlch suggesLs LhaL oLher wagedeLermlnlng forces are more perLlnenL 1hey
also argue LhaL Lylng wages Lo producLlvlLy ylelds sLable prlces only when producLlvlLy lncreases are accepLed as a
llmlL Lo wage lncreases Cbvlously when Lhe cosL of llvlng ls lncreaslng llmlLlng wage lncreases Lo producLlvlLy
lncreases would be unpalaLable Lo employees Lven more unaccepLable would be wage cuLs when economywlde
producLlvlLy decllnes as has someLlmes occurred
1he lnflaLlonary poLenLlal of producLlvlLy formulas LhaL are noL accepLed as llmlLs ls enhanced by a Lendency Lo seek
a producLlvlLy measure LhaL makes larger wage lncreases feaslble lncreases ln lndusLry producLlvlLy for example
may be hlgher buL lndusLry lndexes are less rellable and more varlable Such lndexes may also conceal Lhe
conLrlbuLlon of one lndusLry Lo anoLhers producLlvlLy Lven lndexes of naLlonal producLlvlLy may oversLaLe non
lnflaLlonary wagelncrease posslblllLles by falllng Lo measure Lhe effecLs of Lransfers of workers from lower Lo
hlgherproducLlvlLy lndusLrles and oLher sources of lncrease ln labor quallLy erhaps enough problems have been
clLed Lo argue agalnsL ralslng wages ln sLrlcL accordance wlLh producLlvlLy lncreases 1he dlfflculLy of securlng
accepLance of wage lncreases based on naLlonal producLlvlLy as a llmlL argues agalnsL Lhe use of such a formula
ulfferenL lndusLrles and organlzaLlons have such varylng raLes of change ln producLlvlLy as Lo Lhrow wages based
solely on producLlvlLy compleLely ouL of llne wlLh oLher wage conslderaLlons PlgherproducLlvlLy lndusLrles would
be penallzed for Lhelr hlgher producLlvlLy and Lhls would harm Lhe economy
roducLlvlLy however may be lnLerpreLed Lo mean LhaL lncreases ln labor producLlvlLy aL consLanL wages lower
labor cosL per unlL 1hls operaLes Lhrough ablllLy Lo pay roducLlvlLy may also be employed ln Lhe narrower sense
LhaL a producLlvlLy lncrease aLLrlbuLed Lo lncreased performance by employees calls for an equlvalenL lncrease ln
pay (as wlLh merlL lncreases or varlable pay plans) AlLhough producLlvlLy lncreases are ofLen menLloned ln wage
level deLermlnaLlon especlally ln labor negoLlaLlons Lhelr effecL as a separaLe conslderaLlon ls probably mlnlmum

2) LMLC?L8 WlLLlnCnLSS 1C A?
Lmployer wllllngness Lo pay may be a more powerful wage deLermlnanL Lhan employer ablllLy Lo pay CrganlzaLlons
frequenLly obLaln and use lnformaLlon on whaL oLher employers pay Such lnformaLlon ls undoubLedly Lhe mosL
used wage level conslderaLlon someLlmes consldered along wlLh Lhe cosL of llvlng AnoLher deLermlnanL of
employer wllllngness Lo pay conslsLs of Lhe sLaLe of supply of parLlcular skllls and Lhe presence of LlghL or loose labor
markeLs

|% Comparab|e Wages
Comparable wages consLlLuLe wlLhouL a doubL Lhe mosL wldely used wage deLermlnanL 1hey represenL Lhe way ln
whlch organlzaLlons achleve Lhe compensaLlon goal of belng compeLlLlve noL only are Lhe wages and salarles of
governmenL employees keyed dlrecLly Lo comparable wages ln labor markeLs buL also Lhose of mosL publlc
employees ln oLher [urlsdlcLlons Also unlons emphaslze coerclve comparlsons and prlvaLe organlzaLlons
consclously Lry Lo keep up wlLh changes ln golng wages erhaps Lhe ma[or reason for Lhls wldespread use of Lhe
concepL of comparable wages ls lLs apparenL falrness ln Lhls vlew comparable wages help ln Lhe aLLracLlon and
reLenLlon goals of compensaLlon 1o mosL people an accepLable deflnlLlon of falr wages ls Lhe wages pald by oLher
employers for Lhe same Lype of work Lmployers flnd Lhls deflnlLlon reasonable because lL lmplles LhaL Lhelr
compeLlLors are paylng Lhe same wages ln essence Lhen labor cosLs become even across Lhe lndusLry AnoLher
reason for Lhe popularlLy of Lhe concepL ls lLs apparenL slmpllclLy AL flrsL glance lL appears qulLe slmple Lo pay Lhe
markeL
Powever Lhls llluslon of slmpllclLy vanlshes once we Lry Lo deLermlne Lhe markeL raLe reclse Lechnlques
carefully employed are requlred Lo flnd comparable [obs and comparable wage or salary raLes numerous declslons
musL be made on whlch organlzaLlons and whlch [obs should be compared and how besL Lo compare Lhem Lqually
lmporLanL are declslons concernlng how Lo analyze Lhe daLa and use Lhem Wage comparlsons may lnvolve oLher
organlzaLlons ln Lhe area or ln Lhe lndusLry wherever locaLed An lmporLanL quesLlon Lo conslder ls wheLher
dlfferences ln compeLlLlve condlLlons ln Lhe producL markeL are slgnlflcanL enough Lo warranL a dlfferenL wage level
regardless of labormarkeL lnfluences
1he golng wage ls an absLracLlon Lhe resulL of numerous declslons on whaL [obs and organlzaLlons Lo lnclude whaL
wage lnformaLlon ls approprlaLe and whaL sLaLlsLlcal meLhods Lo employ Some employers declde Lo pay on Lhe
hlgh slde of Lhe markeL oLhers on Lhe low slde 1he resulL ls a range of raLes Lo whlch varlous sLaLlsLlcal measures
may be applled varlous lnLerpreLaLlons of Lhe golng raLe may be made and [usLlfled 1o rely on comparable wages
as a wage deLermlnanL ls Lo rely on wages as lncome raLher Lhan as cosLs Comparable wage raLes may represenL
enLlrely dlfferenL levels of labor cosLs ln Lwo dlfferenL organlzaLlons SeLLlng wage levels sLrlcLly on Lhe basls of golng
wages could lmpose severe hardshlps on one organlzaLlon buL a much lower labor cosL on anoLher 1hese dlfflculLles
are noL lnsurmounLable many employers lean heavlly on wage and salary surveys Lmployer cholces on whaL
surveys Lo acqulre and use whaL benchmark [obs Lo aLLend Lo and how Lo analyze lnLerpreL and use Lhe daLa
suggesL LhaL reasonable accommodaLlons Lo Lhe markeL are usually posslble
ln addlLlon Lo offerlng a cerLaln measurablllLy followlng comparable wages conLalns a good deal of economlc
wlsdom Wages are prlces Cne funcLlon of prlce ln a compeLlLlve economy ls Lhe allocaLlon of resources use of
comparablewage daLa operaLes roughly Lo allocaLe human resources among employers lurLhermore comparlsons
slmpllfy Lhe Lask of declslon makers and negoLlaLors Cnce approprlaLe comparlsons are declded upon dlfflculLles
are mlnlmlzed A wage level can be seL where Lhe wage becomes saLlsfacLory as lncome and operaLes reasonably
well ln lLs allocaLlon funcLlon Wages as cosLs are also saLlsfled because unlL labor cosLs can dlffer wldely beLween
Lwo organlzaLlons havlng ldenLlcal wage raLes also unlL labor cosLs can be ldenLlcal ln Lwo organlzaLlons havlng
wldely dlfferenL wage raLes Comparable wages also operaLe as a force for generallzlng changes ln wage levels
regardless of Lhe source of change unforLunaLely however alLhough changes ln golng wages Lell whaL occurred
Lhey donL Lell why lL occurred 1he changes may represenL lnsLlLuLlonal behavloral or eLhlcal conslderaLlons more
Lhan economlc ones
Cn balance however comparable wages probably operaLe as a conservaLlve force 8ecause wage declslons lnvolve
fuLure cosLs employers are undersLandably unwllllng Lo ouLdlsLance compeLlLors ln a LlghL labor markeL changes ln
golng wages may compel an organlzaLlon Lo pay more Lo geL and keep a labor force especlally of crlLlcal skllls 8uL ln
more normal perlods where unemploymenL exceeds [ob vacancles employers wlll more llkely focus on equallzlng
Lhelr labor cosLs wlLh Lhose of producLmarkeL compeLlLors ln oLher words comparable wages are followed as long
as oLher conslderaLlons are noL more compelllng

||% Cost of |v|ng
CosL of llvlng ls emphaslzed by workers and Lhelr unlons as a wage level conslderaLlon when lL ls rlslng rapldly ln
such Llmes Lhey pressure employers Lo ad[usL wages Lo offseL Lhe rlse ln parL Lhese demands represenL a plea for
lncreases Lo offseL reducLlons ln real wages (wages dlvlded by Lhe cosL of llvlng) Wage pressures resulLlng from
changes ln Lhe cosL of llvlng flucLuaLe wlLh Lhe rapldlLy wlLh whlch llvlng cosLs rlse however prlce rlses ln mosL
years have produced employee expecLaLlons of aL leasL annual pay lncreases 1o employees a saLlsfacLory pay plan
musL reflecL Lhe effecL of lnflaLlon on flnanclal needs 1hls can come lnLo confllcL wlLh Lhe currenL emphasls on
varlable pay
Lmployers undersLandably reslsL or should lncreaslng pay levels on Lhe basls of lncreases ln Lhe cosL of llvlng unless
changes ln compeLlLlve wages and/or producLlvlLy fully reflecL Lhese changes whlch Lhey seldom do lncreases ln
Lhe cosL of llvlng are parLlally LranslaLed lnLo wage lncreases by mosL employers Lhrough paymenL of comparable
wages and longLerm conLracLs wlLh unlons have fosLered oLher meLhods of lncorporaLlng cosLof llvlng changes
Cne such meLhod ls Lhe reopen|ng c|ause whlch permlLs wages Lo be renegoLlaLed durlng a longLerm conLracL
AnoLher ls Lhe deferred wage lncrease an aLLempL Lo anLlclpaLe economlc changes aL Lhe Llme Lhe conLracL ls
slgned A Lhlrd ls Lhe esca|ator c|ause by whlch wages are ad[usLed durlng Lhe conLracL perlod ln accordance wlLh
changes ln Lhe cosL of llvlng ln Lhls Lhlrd meLhod llvlngcosL changes are measured by changes ln Lhe Consumer
rlce lndex
LscalaLor clauses vary ln popularlLy from year Lo year ln accordance wlLh Lhe rapldlLy of cosLofllvlng changes durlng
Lhe perlod lmmedlaLely precedlng Lhe slgnlng of Lhe conLracL and wlLh anLlclpaLlon of subsequenL rlses ln Lhe pasL
as much as 60 percenL of workers under large unlon conLracLs have been covered by escalaLor clauses erlods of
reduced lnflaLlon Lend Lo reduce Lhelr popularlLy nonunlon employers are much less llkely Lo ad[usL wage levels ln
accord wlLh changes ln Lhe cosL of llvlng or aL leasL Lo admlL LhaL Lhey do MosL organlzaLlons would clalm LhaL Lhey
granL merlL pay lncreases each year Powever when all or almosL all employees geL Lhe same lncrease lL looks more
llke a cosLofllvlng ad[usLmenL ln exLreme condlLlons such as Lhe laLe 1970s doubledlglL lnflaLlon organlzaLlons
were prompLed Lo make slgnlflcanL cosLofllvlng ad[usLmenLs
Lmploylng Lhe cosL of llvlng as a wagelevel deLermlnanL ls somewhaL conLroverslal Wage raLes do Lend Lo follow
changes ln Lhe cosL of llvlng ln Lhe shorL run 1ylng wages Lo changes ln Lhe cosL of llvlng provldes a measure of
falrness Lo employees by assurlng Lhem LhaL Lhelr real wages are noL devalued 8uL uslng Lhe cosL of llvlng as a
deLermlnanL also lmplles a consLanL sLandard of llvlng PlsLorlcally unlons have opposed Lhe prlnclple for Lhls
reason MeLhods LhaL provlde Lhe same absoluLe cosLofllvlng ad[usLmenL for all employees may acLually lmpalr
falrness Lo employee Such flaL ad[usLmenLs lmply LhaL everyones cosL of llvlng ls Lhe same and has changed by Lhe
same amounL unforLunaLely Lechnlcal problems ln measurlng changes ln Lhe cosL of llvlng may make such effecLs
lnequlLable


|||% Cost of |v|ng and Average Wage
A cosLofllvlng lndex measures changes overLlme ln Lhe prlces of a consLanL bundle of goods and servlces 1he
bundle of goods and servlces (called a markeL baskeL) ls obLalned by asklng a group whose cosL of llvlng ls Lo be
measured Lo keep a record of Lhe prlce of Lhelr purchases 1hese daLa are Lhen used Lo creaLe Lhe lndex
1he kenya naLlonal 8ureau of SLaLlsLlcs (kn8S) has been publlshlng such an lndex slnce 1921 called Lhe Consumer
rlce lndex 1he Cl was developed Lo measure Lhe cosL of llvlng for famllles of urban wage earners As such lL
became Lhe basls of escalaLor clauses ln unlon conLracLs Llke any general lndex Lhe Cl ls an absLracLlon LhaL rarely
corresponds wlLh Lhe acLual llvlngcosL changes for any glven famlly lamlly consumpLlon paLLerns dlffer due Lo age
lncome composlLlon LasLes and oLher characLerlsLlcs 1hese dlfferences mean LhaL Lhe Cl varles greaLly ln lLs
ablllLy Lo measure cosLofllvlng changes for varlous groups Moreover consumpLlon paLLerns change over Llme as
does Lhe quallLy of producLs
AL presenL Lwo lndexes are publlshed Lhe Clu and Lhe ClW 1he Clu represenLs all urban households
lncludlng urban workers ln all occupaLlons Lhe unemployed and reLlred persons 1he ClW represenLs urban wage
and clerlcal workers employed ln bluecollar occupaLlons 8oLh Cl measures exclude rural households mlllLary
personnel and persons ln lnsLlLuLlonallzed houslng such as prlsons old age homes and longLerm hosplLal care 1he
kn8S has made changes Lo lmprove Lhe lndex over Llme and Lo meeL speclflc problems 1he laLesL change Lo boLh
lndexes lnvolved subsLlLuLlng a renL equlvalenL for home ownershlp unLll Lhe early 1980s Lhe Cl used whaL ls
called Lhe asseL prlce meLhod Lo measure Lhe change ln Lhe cosLs of owneroccupled houslng 1he asseL prlce
meLhod LreaLs Lhe purchase of an asseL such as a house as lL does Lhe purchase of any consumer good 8ecause
Lhe asseL prlce meLhod can lead Lo lnapproprlaLe resulLs for goods LhaL are purchased largely for lnvesLmenL
reasons Lhe Cl lmplemenLed Lhe renLal equlvalence approach Lo measurlng prlce change for owneroccupled
houslng
Cbvlously such Lechnlcal problems mean LhaL Lylng wage levels Lo Lhe Cl varles ln falrness Lo dlfferenL groups
Moreover aL leasL ln unlons and perhaps ln mosL organlzaLlons falrness seems Lo suggesL Lhe same cosLofllvlng
ad[usLmenL for everyone A compressed wage sLrucLure resulLlng from flaL cosLofllvlng lncreases may produce
dlfflculLles ln recrulLlng and keeplng hlgherlevel employees lL seems LhaL changes ln Lhe cosL of llvlng do noL closely
parallel changes ln Lhe supplydemand slLuaLlon of any speclflc employee group Also parLlcular organlzaLlons and
lndusLrles may face compeLlLlve slLuaLlons ln producL markeLs LhaL run counLer Lo changes ln llvlng cosLs lL also
seems LhaL wage lncreases LhaL fully reflecL llvlngcosL lncreases bulld lnflaLlon lnLo Lhe economy lorLunaLely
alLhough escalaLor clauses narrow Lhe Llme gap beLween prlce and wage changes ln an lnflaLlonary perlod Lhey
have been found Lo yleld only abouL 37 percenL of a years lnflaLlon and Lhey apply Lo only abouL Len percenL of
nonagrlculLural employmenL
ln summary Lhe cosL of llvlng as a wage level deLermlnanL usually operaLes lndlrecLly AlLhough aLLracLlve Lo
employees unlons and some employlng organlzaLlons ln perlods of rapldly rlslng prlces lL should never be used as
Lhe sole sLandard of wage ad[usLmenL When lnfluences ln Lhe labor markeL are sLronger Lhan Lhose ln Lhe producL
markeL cosLofllvlng conslderaLlons may lncrease an employers wllllngness Lo pay 8uL when an employer ls faced
wlLh sLrong compeLlLlon ln Lhe producL markeL employees may have Lo choose beLween malnLalnlng Lhelr real
wages and malnLalnlng Lhelr [obs ln lnflaLlonary perlods Lhe cosL of llvlng relnforces golng wages Lhrough employer
wllllngness Lo pay

|v% abor Supp||es
Cne conslderaLlon always presenL ln wage level deLermlnaLlon ls Lhe compensaLlon goal of obLalnlng and reLalnlng
an adequaLe work force 1he wage level musL be sufflclenL Lo perform Lhls funcLlon or Lhe organlzaLlon cannoL
operaLe LffecLlveness of recrulLmenL efforLs refusal Lo offer raLes and labor Lurnover levels may each be
consldered ln wage level declslons 1he wage level lLself ls only one deLermlnanL LhaL effecLs recrulLmenL
effecLlveness and labor Lurnover 8uL lL ls an lmporLanL one ln LhaL lL ls usually agreed Lo be Lhe ma[or elemenL ln
[ob cholce Changlng economlc condlLlons can have a rapld change ln demand for cerLaln skllls 1hls creaLes a
shorLage of avallable workers wlLh Lhose skllls as supply does noL change as rapldly Cne such change occurred
when lnLeresL raLes fell and mosL home owners elecLed Lo reflnance Lhelr homes on Lop of colncldlng hlgh sales of
homes 1hls creaLed an lmmedlaLe hlgh demand for MorLgage Loan rocessors CrganlzaLlons were faced wlLh
ralslng wages for Lhese workers far above equlvalenL [obs ln Lhelr organlzaLlons lurLher organlzaLlons engaged ln
Lralnlng people for Lhese [obs 1hen Lwo Lhlngs happened llrsL Lhe supply began Lo caLch up wlLh Lhe demand 1hen
Lhe real esLaLe markeL slumped and lnLeresL raLes wenL up meanlng Lhe demand for MorLgage Loan rocessors fell
leavlng organlzaLlons wlLh a group of overpald employees lf however an organlzaLlon experlences no recrulLmenL
or Lurnover problems lL may presume LhaL Lhe presenL wage level ls adequaLe Lo permlL securlng and holdlng a
labor force 8uL quallLy lssues may sLlll arlse ls Lhe quallLy of Lhe labor force belng malnLalned or have employees of
lower efflclency been Lhe only ones avallable aL Lhe presenL wages? ls Lhe quallLy of Lhe presenL labor force
adequaLe? ls lL more Lhan adequaLe? ls a change ln sLandards of employablllLy a good ldea? Can such a change be
accompllshed aL presenL pay levels?
Such quesLlons emphaslze Lhe polnL LhaL lL may be more lmporLanL Lo malnLaln Lhe quallLy of a labor force Lhan Lhe
quanLlLy A labor force of low quallLy aL a glven wage level may be more cosLly Lo Lhe organlzaLlon Lhan a labor force
of hlgher quallLy obLalned aL a hlgher wage level buL resulLlng ln lower unlL labor cosLs lf an employer can lower
unlL labor cosLs by ralslng Lhe wage level and sLandards of employablllLy such a course would deserve careful
conslderaLlon 1hls approach parLlally explalns Lhe exlsLence of wage leaders CrganlzaLlons LhaL pay on Lhe hlgh
slde may do so ln Lhe hope of aLLracLlng a hlgherquallLy labor force Wage leadershlp may noL only permlL
sklmmlng Lhe cream off Lhe presenL labor force lL may ensure a conLlnulng supply of hlghquallLy personnel from
new enLranLs Wage leadershlp companles ofLen have a walLlng llsL of appllcanLs whereas oLhers musL conLlnually
use an aggresslve recrulLmenL program
Wage level declslons based on laborsupply conslderaLlons musL be made ln llghL of Lhe prospecLs of Lhe
organlzaLlon and Lhe lndusLry llrms ln decllnlng lndusLrles may be forced Lo allow wage levels Lo drop wlLh reduced
producLlvlLy and Lo plan on less efflclenL and lowerpald work forces An expandlng organlzaLlon on Lhe oLher hand
may wanL Lo upgrade Lhe quallLy of lLs work force by paylng above Lhe markeL and ralslng sLandards of
employablllLy 1he exLenL Lo whlch laborsupply conslderaLlons affecL wage levels varles greaLly among
organlzaLlons CrganlzaLlons ln hlghwage lndusLrles ln lowwage areas experlence few laborsupply problems
Lhose ln lowwage lndusLrles may face serlous laborsupply problems AlLhough mosL organlzaLlons flll mosL of Lhelr
[obs from wlLhln lL ls doubLful LhaL any organlzaLlon ls free from laborsupply problems for aL leasL some skllls As
emphaslzed mosL organlzaLlons operaLe ln numerous labor markeLs noL only does Lhe exLenL of Lhe markeL (local
reglonal naLlonal or lnLernaLlonal) vary for dlfferenL skllls buL Lhe use of lnLernal labor markeLs varles among
organlzaLlons 1hose wlLh relaLlvely open lnLernal labor markeLs flll mosL [obs from ouLslde 1hose wlLh relaLlvely
closed lnLernal labor markeLs flll almosL all [obs from wlLhln
Cbvlously laborsupply conslderaLlons affecLlng wage levels vary wlLh labor markeLs !obs fllled exLernally musL
meeL or exceed Lhe golng raLe !obs fllled lnLernally are consLralned only by organlzaLlon declslons ln boLh
slLuaLlons Lhe organlzaLlon ls able Lo vary lLs pay levels and hlrlng sLandards on Lhe basls of lLs wllllngness Lo pay

v% Sk||| and Lducat|on
8ecenL emphasls ln compensaLlon upon compeLency and sklll based pay makes sklll and educaLlon an lmporLanL
wage level deLermlnanL AL Lhe level of Lhe economy Lhls focus has been playlng ouL for some Llme ln Lhe problem
of wage lnequallLy ln Afrlca 8eLween 1979 and 1993 Lhe raLlo beLween workers ln Lhe 90 percenLlle and Lhose ln
Lhe 10Lh percenLlle lncreased from 37 Lo 48 Maybe even more lmporLanL ls LhaL real wages for workers ln Lhe 10Lh
percenLlle fell from 1970 Lo 1990 whlle Lhose ln Lhe 90Lh percenLlle rose by 10 Lo 13 Lhls lncrease for workers ln
Lhe 90Lh percenLlle conLlnued Lhrough Lhe 1990s Cne of Lhe ma[or forces behlnd Lhls change has been Lhe
lncreaslng need for educaLed workers and Lhe response of many more people golng on Lo college

1he resulL of Lhls Lrend ls creaLlng an hour glass shaped work force ln whlch Lhe mlddle class ls belng squeezed ouL
leavlng a large group of hlghly Lralned workers aL Lhe Lop of Lhe labor markeL and anoLher large group of unskllled
workers aL Lhe boLLom of Lhe markeL MovemenL up Lhe scale ls more and more on Lhe basls of educaLlon raLher
Lhan experlence 1o Lhe exLenL LhaL Lhls Lrend ls repllcaLed ln Lhe organlzaLlon lL would lndlcaLe LhaL developlng a
wage level based upon Lhe organlzaLlon's average wage would be unsaLlsfacLory for Lhe ma[orlLy of employees 1hls
slLuaLlon would call for Lwo clearly dlfferenL wage levels one for Lhe Lop and one Lhe boLLom 1hls seems Lo be
reflecLed ln Lhe move Lowards a core group of employees wlLh good wages beneflLs and a degree of securlLy and
a perlpheral group of Lemporary and parL Llme employees wlLh low wages llLLle ln Lhe way of beneflLs and no [ob
securlLy

% L,9CLL ACCL91ANCL
1he conslderaLlons employers use ln deLermlnlng wage levels musL meeL Lhelr LesL of employee or poLenLlal
employee accepLance lf employees are unwllllng Lo accepL Lhe wages offered Lhe employmenL conLracL and Lhe
efforL bargaln are noL compleLed 1hls sLaLemenL suggesLs LhaL all of Lhe facLors dlscussed ln Lhe above paragraphs
are poLenLlal wage level deLermlnanLs lor example employee expecLaLlons employee deflnlLlons of equlLy and
employee saLlsfacLlon or dlssaLlsfacLlon wlLh pay become perLlnenL conslderaLlons So do Lhe demands of unlons
and socleLy (Lhrough laws and regulaLlons) ldeally Lhese conslderaLlons flnd Lhelr way lnLo employers declslons
regardlng Lhelr ablllLy and wllllngness Lo pay

9LkILC1 A8Ck ,AkkL1
erfecL compeLlLlon ln a resource markeL means LhaL Lhere are many small buyers of Lhe resource and LhaL none
can lnfluence Lhe markeL 1he supply curve ls ldenLlcal Lo Lhe marglnal resource cosL curve (M8C) and ls horlzonLal
1he wage ls glven dlrecLly by Lhe lnLersecLlon of Lhe supply llne and M8 curve (whlch ls Lhe demand for labor)
1ake clerlcal work for lnsLance All buslnesses need someone Lo do Lyplng flllng and keeplng records Many
poLenLlal employees are avallable 1here ls no need for Lhe flrm Lo offer a hlgher wage Lhan Lhe currenLly prevalllng
wage for LhaL Lype of work nor should Lhe flrm offer less because lf lL dld lL would flnd no one wllllng Lo work
When we use Lhe model of demand and supply Lo analyze Lhe deLermlnaLlon of wages and employmenL we are
assumlng LhaL markeL forces noL lndlvlduals deLermlne wages ln Lhe economy 1he model says LhaL equlllbrlum
wages are deLermlned by Lhe lnLersecLlon of Lhe demand and supply curves for labor ln a parLlcular markeL
Workers and flrms ln Lhe markeL are Lhus prlce Lakers Lhey Lake Lhe markeLdeLermlned wage as glven and respond
Lo lL We are ln Lhls lnsLance assumlng LhaL perfecL compeLlLlon prevalls ln Lhe labor markeL !usL as Lhere are some
slLuaLlons ln Lhe analysls of markeLs for goods and servlces for whlch such an assumpLlon ls lnapproprlaLe so Lhere
are some cases ln whlch Lhe assumpLlon ls lnapproprlaLe for labor markeLs


I,9LkILC1 A8Ck ,AkkL1
1he currenL sLage of developmenL assoclaLed wlLh a new look aL labor as one of Lhe key resources uemand curve
uL wlll colnclde wlLh Lhe curve of Lhe marglnal producL ln moneLary Lerms 8uL as monopsonlsL pays equal pay for
each unlL of goods Lhe supply curve of labor for lL ls a curve of average cosLs (SL AC) 1he lnvolvemenL of each
addlLlonal worker means ralslng wages for all workers lncludlng Lhose for Lhe prevlously employed
1herefore M8CL marglnal cosL curve lles above Lhe curve of average cosLs When chooslng Lhe number of
employees monopsonlsL wlll be gulded by equallLy of Lhe marglnal producL and marglnal cosL (polnL L1) AfLer
a verLlcal curve Lo Lhe SL and deslgnaLe a polnL M we can deLermlne Lhe level of wages WM as well as Lhe amounL
of labor used by LM
Whlle under perfecL compeLlLlon Lhe equlllbrlum wage raLe would be aL Lhe level of WL and Lhe equlllbrlum
number of workers would be equal Lo Le 1hus ceLerls parlbus monopsonlsL maxlmlzes proflLs by hlrlng fewer
workers and Lhus pays a wage raLe lower Lhan ln a compeLlLlve envlronmenL ln reallLy Lhe slLuaLlon of monopsony
can arlse ln Lhe labor markeL ln a small Lown where Lhere ls for example only one planL one hosplLal a school eLc

8IA1LkA ,CNC9C IN 1nL A8Ck ,AkkL1
Speclal slLuaLlon ln Lhe labor markeL ls developlng ln Lhe evenL LhaL Lhere are Lrade unlon monopoly and Lhe
employermonopsonlsL 1o analyze Lhls slLuaLlon graphlcally lL ls necessary Lo comblne Lhe Lwo graphs one LhaL
reflecLs Lhe acLlvlLles of monopsony Lhe oLher Lhe unlon under perfecL compeLlLlon Lhe equlllbrlum wage raLe
would be esLabllshed aL Lhe level of W whlle lL would be occupled by L man Powever Lhe flrm monopsonlsL wlll
always sLrlve Lo reduce wages Lo Lhe level of Wm by reduclng Lhe number of employed wlLh L up Lo Lm 1he unlon
ln Lurn wlll seek Lo ralse wages Lo Wu and reduclng Lhe supply of labor 1hus wlLh relaLlvely small dlfferences ln
Lhe number of employed workers deslred wage raLe ln Lhe unlon and monopsony wlll vary slgnlflcanLly WhaL wlll be
Lhe level of wages clearly lmposslble Lo say LveryLhlng depends on Lhe sLrengLh of opposlng monopolles lL ls also
posslble LhaL Lhe wage raLe close Lo lLs equlllbrlum level 1hus bllaLeral monopoly can lead Lo resulLs LhaL are much
closer Lo a compeLlLlve markeL Lhan Lo markeL condlLlons where Lhe monopoly of one parLy or anoLher

WAGL DL1Lk,INA1ICN IN ,CNC9SCN
A flrm has a monopsonlsLlc power when lL ls able Lo pay a lower prlce for a larger quanLlLy of a resource used A
monopsony Lyplcally exlsLs when a flrm ls Lhe sole employer ln a reglon or a professlon lor a monopsony Lhe
marglnal resource cosL curve ls above Lhe supply curve 1he opLlmum quanLlLy of labor ls deLermlned by Lhe
lnLersecLlon of M8C and M8 1he wage ls obLalned by exLendlng LhaL quanLlLy level down Lo Lhe supply curve
1he news medla has reporLed lnsLances where employees have complalned of belng underpald as a resulL of a
company belng Lhe domlnanL or only employer ln a Lown lor lnsLance such reporLs appeared abouL Lhe Ceneral
LlecLrlc Pormel (a meaL packaglng planL) and WesLolnLepperel (LexLlle manufacLurer) ln Lhe unlLedSLaLes ln
each of Lhese cases Lhe employer ls able Lo offer a lower wage because local resldenLs have llLLle cholce buL Lo work
for LhaL employer

WAGL DIIILkLN1IAS
Wage dlfferenLlals occur ln all markeLs ln some cases Lhese dlfferenLlals acL Lo aLLracL people Lo Lhe markeL who
would noL ordlnarlly conslder Lhose [obs and Lo reflecL Lhe rarlLy of skllls eLc Powever Lhere are also oLher wage
dlfferenLlals whlch occur due Lo markeL lmperfecLlons and dlscrlmlnaLlon on Lhe parL of Lhe employer
Labor markeL lmperfecLlons can occur on boLh Lhe supply and demand slde or ln some case boLh sldes Wages are
lower when Lhe employer ls a monopsonlsL because Lhey acL as a monopollsL and can erode unlon conLrol of Lhe
labour ln Lhe markeL Cn Lhe supply slde of Lhe labour markeL 1rade unlons cause lmperfecLlons by uslng Lhe LhreaL
of sLrlkes and labour supply Lhey can force up wages Lo Lhe deLrlmenL of employmenL levels When Lhe markeL has
boLh demand lmperfecLlons ln Lhe form of monopsony and supply lmperfecLlons ln Lhe form of unlons Lhe wage wlll
depend on Lhe negoLlaLlng poslLlon of Lhe Lwo sldes 1here can be wage lmperfecLlons when lnformaLlon fallure
occurs employees may be mlslnformed abouL Lhe avallablllLy of [obs aL dlfferenL wages As a resulL Llme wlll be
spenL looklng for work offerlng accepLable" wage raLes 1hls process wlll lncur cosLs lncludlng forgone wages when
workers re[ecL lower pald [obs ln favour of looklng for a more accepLable wage Lheory Lells us LhaL Lhe accepLable
wage wlll decrease Lhe longer Lhe employee Lakes Lo geL Lhe [ob Wage dlfferenLlals ln a markeL economy are Lhere
Lo correcL and compensaLe for dlfferences ln labour markeLs Powever Lhey are noL all perfecL and can be dlvlslve
and unproducLlve ulfferences beLween wages are explalned by
dlfferenL levels of skllls and educaLlon
nonmoneLary aspecLs such as rlsk and seasonallLy
markeL lmperfecLlons lack of knowledge lack of geographlcal and socloeconomlc moblllLy
lL ls raLher obvlous LhaL a medlcal docLor would recelve a hlgh salary because of hls/her knowledge and skllls Plgh
salarles of workers ln consLrucLlon or on oll rlgs can be explalned by Lhe very real hazard Lhese occupaLlons presenL
for workers safeLy Lmployees who lnvesL Llme ln educaLlon are more valuable Lo employers due Lo hlgher
producLlvlLy and consequenLly Lhey can demand a hlgher wage Lhan unskllled labour 1he acqulrlng of skllls ls called
human caplLal lnvesLmenL and ls seen as a longLerm assurance of hlgh quallLy on Lhe parL of employers and long
Lerm hlgh wages on Lhe parL of employees Many professlonal occupaLlons requlre several years of fullLlme
educaLlon aL unlverslLy or college and oLhers requlre lnLermedlaLe quallflcaLlons Cne can see LhaL Lhrough Lhe
lncreaslng modernlsaLlon and lndusLrlallsaLlon Lhe demand for skllled labour conLlnues Lo rlse whllsL employmenL
opporLunlLles for Lhe unskllled conLlnue Lo fall 1he use of wage dlfferenLlals ln Lhls slLuaLlon ls Lo reward Lhe work
lnvolved ln Lhe aLLalnlng vocaLlonal quallflcaLlons however Lhls ls Lo Lhe deLrlmenL of unskllled workers whose [obs
become obsoleLe
AnoLher wage dlfferenLlal occurs as a compensaLlng facLor Lo employees who have Lo endure less aLLracLlve work
condlLlons 1hls ls known as a compensaLlng wage dlfferenLlal Where worklng condlLlons are undeslrable Lhen Lhe
supply wlll be reduced and Lherefore wages wlll have Lo be hlgher Lo aLLracL Lhe adequaLe amounL of labour Also
occupaLlons whlch demand unsoclable hours wlll command a hlgher wages Lhan comparable [obs ay may noL be
Lhe only Lhlng whlch wlll be used by employers Lo compensaLe for poor worklng condlLlons le A number of non
moneLary beneflLs such as longholldays wlLh pay Lhe opporLunlLy Lo Lravel eLc wlll all be used Lo lncrease markeL
supply 8eglonal varlaLlons can also explaln cerLaln wage dlfferenLlals as wages are hlgh ln cerLaln areas Lhen
labour wlll be drawn Lhere however flrms wlll Lry and do Lhe opposlLe 1hrough Lhe push and pull of cerLaln facLors
ln Lhe long run Lhe markeL should correcL any reglonal dlfferenLlals especlally ln key work areas ulscrlmlnaLlon can
also accounL for cerLaln wage dlfferenLlals 8aclal and gender dlscrlmlnaLlon can accounL for a large amounL of Lhe
dlfferenLlal ln wages beLween whlLe males and Lhe resL of Lhe worklng populaLlon Lmployers wlll pay women and
eLhnlc mlnorlLles less due Lo llllnformed vlews abouL Lhe lnLelllgence loyalLy and producLlveness of female and
nonwhlLe workers 1he governmenL has Laken some acLlon Lo counLeracL Lhese unwanLed and unproducLlve wage
dlfferenLlals wlLh Lhe lnLroducLlon of Lhe Lqual ay AcL Lhe Sex ulscrlmlnaLlon AcL and Lhe 8ace 8elaLlon AcL