KENYA |N8T|TUTE 0F HANACEHENT

NAHE: L0RNA AT|EN0 0KAT6h

A0H|N0: NRß|4825ô

60UR8E: LAß0R E60N0H|68

600E: 06H 202

TA8K: h0HE ßA8E0 A88|ChNHENT.

LE6TURER: HR.0RE8|


















WACL
Wage lncludes all forms of remuneraLlon for all human producLlve acLlvlLles uslng oneƌs sklllsŦ 1husţ wage ls Lhe
comblnaLlon of salaryţ bonus and oLher forms of compensaLlonŦ Wage ls pald for work as varlous as LhaL of a
blueŴcollar mechanlcţ as well as LhaL of a lawyerŦ 1he dollar amounL recelved ls referred Lo as nomlnal wageŦ 1he
purchaslng power of amounL recelved work ls real wageŦ
ln economlcsţ wage ls a general LermŦ lor lnsLanceţ Lhe work performed by a medlcal docLor may resulL ln a feeţ and
varlous oLher names are used for dlfferenL professlonsŦ lor economlsLsţ Lhe dlfferenL Lypes of work do noL maLLerť lL
ls all laborţ and Lhe prlce or paymenL ls wageŦ
8LAL WACL
1he shllllngs amounL recelved for an hourƌs work ls referred Lo as nomlnal wageŦ 8eal wage ls Lhe nomlnal wage
ad[usLed for lnflaLlonŦ lL ls calculaLed by dlvldlng Lhe shllllng amounL by one plus Lhe raLe of lnflaLlonŦ 1he raLe of
change ln unlL labor cosL ls equal Lo Lhe raLe of change ln real wage less Lhe raLe of change ln producLlvlLyŦ 1hus unlL
labor cosL does noL lncrease as long as Lhe raLe of growLh of real wage ls [usL equal Lo Lhe growLh of producLlvlLyŦ
WhaL a salary can buy ln Lerms of varlous goods and servlces ls real wageŦ lL ls only used as a comparlson Lo some
prlor Llme perlodŦ 1he consumer prlce lndex ls ofLen used as Lhe raLe of lnflaLlonŦ
1nLCkILS CI WAGLS
kes|dua|Ŵc|a|mant theory
lL holds LhaLţ afLer all oLher facLors of producLlon have recelved Lhelr share of Lhe producLţ Lhe amounL lefL goes Lo
Lhe remalnlng facLorŦ Some scholars sald LhaL renL would be deducLed flrsL and proflLs nexLŦ lrancls AŦ Walker ln
1873 worked ouL a resldual Lheory of wages ln whlch Lhe shares of Lhe landlordţ caplLallsLţ and enLrepreneur were
deLermlned lndependenLly and subLracLedţ Lhus leavlng Lhe remalnder for labour ln Lhe form of wagesŦ lL should be
noLedţ howeverţ LhaL any of Lhe facLors of producLlon may be selecLed as Lhe resldual clalmanLţ assumlng LhaL
lndependenL deLermlnaLlons may be made for Lhe shares of Lhe oLher facLorsŦ lL ls doubLfulţ Lhereforeţ LhaL such a
Lheory has much value as an explanaLlon of wage phenomenaŦ
8arga|n|ng theory
lL holds LhaL wagesţ hoursţ and worklng condlLlons are deLermlned by Lhe relaLlve bargalnlng sLrengLh of Lhe parLles
Lo Lhe agreemenLŦ lL was noLed LhaL employers had greaLer bargalnlng sLrengLh Lhan employeesţ because lL was
easler for employers Lo comblne ln opposlLlon Lo employeesƌ demands and also because employers were flnanclally
able Lo wlLhsLand Lhe loss of lncome for a longer perlod Lhan Lhe employeesŦ 1hls ldea was developed Lo a
conslderable exLenL by !ohn uavldsonţ who arguedţ ln 1898ţ LhaL Lhe deLermlnaLlon of wages ls an exLremely
compllcaLed process lnvolvlng numerous lnfluences LhaL lnLeracL Lo esLabllsh Lhe relaLlve bargalnlng sLrengLh of Lhe
parLlesŦ 1here ls no one facLor or slngle comblnaLlon of facLors LhaL deLermlnes wagesţ and Lhere ls no one raLe LhaL
necessarlly prevallsŦ 8ecause Lhere are many posslblllLlesţ Lhere ls a range of raLes wlLhln whlch any number of raLes
may exlsL slmulLaneouslyŦ 1he upper llmlL of Lhe range ls seL by Lhe raLe beyond whlch Lhe employer refuses Lo hlre
cerLaln workersŦ 1hls raLe ls lnfluenced by such conslderaLlons as Lhe producLlvlLy of Lhe workersţ Lhe compeLlLlve
slLuaLlonţ Lhe slze of Lhe lnvesLmenLţ and Lhe employerƌs esLlmaLe of fuLure buslness condlLlonsŦ 1he lower llmlL of
Lhe range ls seL by Lhe raLe below whlch Lhe workers wlll noL offer Lhelr servlces Lo Lhe employerŦ 1hls raLe ls
lnfluenced by such conslderaLlons as mlnlmum wage leglslaLlonţ Lhe workersƌ sLandard of llvlngţ Lhelr appralsal of
Lhe employmenL slLuaLlonţ and Lhelr knowledge of raLes pald Lo oLhersŦ
nelLher Lhe upper nor Lhe lower llmlL ls flxedţ and elLher may move upward or downwardŦ 1he raLe or raLes wlLhln
Lhe range are deLermlned by relaLlve bargalnlng powerŦ
1he bargalnlng Lheory ls very aLLracLlve Lo labour organlzaLlonsţ forţ conLrary Lo Lhe subslsLence and wagesŴfund
Lheorlesţ lL provldes a very cogenL reason for Lhe exlsLence of unlonsŦ 1he bargalnlng sLrengLh of a unlon ls much
greaLer Lhan LhaL of Lhe members acLlng as lndlvldualsŦ Also Lhere are slLuaLlons (bllaLeral monopolyţ for lnsLance)
under whlch LheoreLlcal analysls arrlves aL a range of wage raLes raLher Lhan a deLermlnaLe raLeŦ 1he acLual raLe
musL depend upon relaLlve bargalnlng powerŦ lL should be observedţ howeverţ LhaL hlsLorlcally labour was able
Lo lmprove lLs slLuaLlon before lLs bargalnlng power became more effecLlve Lhrough organlzaLlonŦ lacLors oLher Lhan
Lhe relaLlve bargalnlng sLrengLh of Lhe parLles musL have been aL workŦ 1he bargalnlng Lheory ofLen glves an
excellenL explanaLlon of a shorLŴrun slLuaLlonţ such as Lhe exlsLence of cerLaln wage dlfferenLlalsţ buL over Lhe long
run lL falls Lo provlde an adequaLe undersLandlng of Lhe changes LhaL have Laken place ln Lhe average level of wagesŦ

,arg|na|Ŵproduct|v|ty theory and |ts cr|t|cs
1oward Lhe end of Lhe 19
Lh
cenLuryţ marglnalŴproducLlvlLy analysls was applled noL only Lo labour buL Lo oLher
facLors of producLlon as wellŦ lL was noL a new ldea as an explanaLlon of wage phenomenaţ lL was observed LhaL a
relaLlonshlp exlsLed beLween wage raLes and Lhe producLlvlLy of labourţ and !ohann Pelnrlch von 1hunenţ a Cerman
economlsLţ had worked ouL a marglnalŴproducLlvlLy Lype of analysls for wages ln 1826Ŧ 1he AusLrlan economlsLs
made lmporLanL conLrlbuLlons Lo Lhe marglnal ldea afLer 1870Ť andţ bulldlng on Lhese groundsţ a number of
economlsLs ln Lhe 1890sţ lncludlng Þhlllp Penry WlcksLeed ln Lngland and !ohn 8aLes Clark ln Lhe unlLed SLaLesţ
elaboraLed Lhe ldea lnLo Lhe marglnalŴproducLlvlLy Lheory of dlsLrlbuLlonŦ lL ls llkely LhaL Lhe dlsLurblng concluslons
drawn by Marx from classlcal economlc Lheory lnsplred Lhls developmenLŦ ln Lhe early 1930s reflnemenLs Lo Lhe
marglnalŴproducLlvlLy analyslsţ parLlcularly ln Lhe area of monopollsLlc compeLlLlonţ were made by !oan 8oblnson ln
Lngland and Ldward PŦ Chamberlln ln Lhe unlLed SLaLesŦ As applled Lo wagesţ Lhe marglnalŴproducLlvlLy 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
workerŦ 1he wage raLe ls esLabllshed ln Lhe markeL Lhrough Lhe demand forţ and supply ofţ Lhe Lype of labourţ and
Lhe operaLlon of compeLlLlon assures Lhe workers LhaL Lhey wlll recelve a wage equal Lo Lhe marglnal producLŦ
under Lhe law of dlmlnlshlng marglnal producLlvlLyţ Lhe conLrlbuLlon of each addlLlonal worker ls less Lhan LhaL of
hls predecessorţ buL workers of a parLlcular Lype are assumed Lo be allkeţ maklng Lhem lnLerchangeableţ and
anyone could be consldered Lhe marglnal workerŦ All recelve Lhe same wageţ andţ Lhereforeţ by hlrlng Lo Lhe
marglnţ Lhe employer maxlmlzes hls proflLsŦ As long as each addlLlonal worker conLrlbuLes more Lo LoLal value Lhan
he cosLs ln wagesţ lL pays Lhe employer Lo conLlnue hlrlngŦ 8eyond Lhe marglnţ addlLlonal workers would cosL more
Lhan Lhelr conLrlbuLlon and would subLracL from aLLalnable proflLsŦ 1he Lheory also provldes an explanaLlon of wage
dlfferenLlalsŦ Wage dlfferenLlals are caused by dlfferences ln marglnal producLŦ

1he wages of skllled workers are hlgher Lhan Lhose of unskllled workers because Lhere are fewer skllled workersţ
and Lhelr marglnal producLţ Lhereforeţ ls hlgherŦ 1he marglnalŴproducLlvlLy Lheory of wages became Lhe prevalllng
wage Lheoryţ andţ alLhough lL has been aLLacked by many and dlscarded by someţ no accepLable alLernaLlve has
been devlsedŦ 1he chlef basls for crlLlclsm of Lhe Lheory ls LhaL lL resLs on unreallsLlc assumpLlonsţ 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 opporLunlLlesŦ Workers areţ ln facLţ noL homogenousŤ usually Lhey have llLLle
knowledge of Lhe labour markeLŤ and because of home Llesţ senlorlLyţ and oLher conslderaLlonsţ Lhey do noL ofLen
move qulckly from one [ob Lo anoLherŦ 1he assumpLlon LhaL employers are able Lo measure producLlvlLy accuraLely
and compeLe freely ln Lhe labour markeL also ls farfeLchedŦ Lven Lhe assumpLlon LhaL all employers aLLempL Lo
maxlmlze proflLs may be doubLedŦ 1he proflL moLlve does noL affecL charlLable lnsLlLuLlons or governmenL agenclesŦ
lor Lhe Lheory Lo operaLe properlyţ labour and caplLal musL be fully employed so LhaL lncreased producLlon can be
secured only aL lncreased cosLŤ caplLal and labour musL be easlly subsLlLuLable for each oLherŤ and Lhe slLuaLlon
musL be compleLely compeLlLlveŦ Cbvlously Lhese assumpLlons do noL flL Lhe real worldţ and some crlLlcs feel LhaL
Lhe resulLs of Lhe Lheory are so mlsleadlng LhaL Lhe Lheory should be abandonedŦ 1he proponenLs argueţ howeverţ
LhaL producLlvlLy glves a rough approxlmaLlon of wagesţ and LhaL alLhough producLlvlLy may noL provlde Lhe
lmmedlaLe explanaLlon ln a parLlcular caseţ lL cerLalnly lndlcaLes longŴrun LrendsŦ 1he Lheoryţ Lhereforeţ has
lmporLanL usesţ and lf Lhe dlfflculLles are kepL ln mlndţ lL can be a valuable LoolŦ

ln a modern economyţ monopollsLlc or near monopollsLlc condlLlons exlsL ln some lmporLanL areasţ 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 oLherŦ under such clrcumsLancesţ Lhe marglnal producLlvlLy analysls
cannoL deLermlne wages preclselyŤ lL can show only Lhe poslLlons LhaL Lhe unlon (as a monopollsL of labour supply)
and Lhe employer (as a monopsonlsLţ or slngle purchaser of labour servlces) wlll sLrlve Lo reachţ dependlng upon
Lhelr currenL pollclesŦ

9urchas|ngŴpower theory
lL lnvolves Lhe relaLlon beLween wages and employmenL and ls noLţ Lhereforeţ a Lheory of wage deLermlnaLlonŦ lL
sLresses Lhe lmporLance of spendlng Lhrough consumpLlon and lnvesLmenL as an lnfluence upon Lhe acLlvlLy of Lhe
economyŦ 1he Lheory galned promlnence durlng Lhe CreaL uepresslon of Lhe 1930sţ when lL became apparenL LhaL
lowerlng wages mlghL noL lncrease employmenL as prevlously had been assumedŦ !ohn Maynard keynesţ Lhe 8rlLlsh
economlsLţ malnLalned ln hls 1heory of LmploymenL lnLeresL and Money/ (1936)ţ 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 ƍall oLher Lhlngs
remalned equalƍ presenLed a speclal case LhaL had no real appllcablllLy Lo Lhe exlsLlng slLuaLlonŦ keynes relaLed
changes ln employmenL Lo changes ln consumpLlon and lnvesLmenLţ and he polnLed ouL LhaL sLable equlllbrlum
could exlsL wlLh less Lhan full employmenLŦ

8ecause wages make up such a large percenLage of Lhe naLlonal lncomeţ changes ln wages usually have an
lmporLanL effecL upon consumpLlonŦ lL ls posslble LhaL lowerlng wages wlll reduce consumpLlon and LhaLţ wlLh Lhe
decllne ln demand for goods and servlcesţ Lhe demand for labour may also fallţ Lhus decreaslng employmenL raLher
Lhan lmprovlng lLŦ WheLher Lhls wlll be Lhe resulLţ howeverţ depends upon several conslderaLlonsţ parLlcularly Lhe
reacLlon upon prlcesŦ lf wages fall more rapldly Lhan prlcesţ labourƌs real wages wlll be drasLlcally reducedţ and
consumpLlon wlll fallţ accompanled by lncreased unemploymenLţ unless LoLal spendlng ls malnLalned by lncreased
lnvesLmenLŦ LnLrepreneurs may look upon Lhe lower wage cosLs ln relaLlon Lo prlces as an encouraglng slgn Loward
greaLer proflLsţ ln whlch case Lhey may lncrease Lhelr lnvesLmenLs and employ more people aL Lhe lower raLesţ Lhus
malnLalnlng or even lncreaslng LoLal spendlng and employmenLŦ lf employers look upon Lhe falllng wages and prlces
as an lndlcaLlon of furLher decllnesţ howeverţ Lhey may conLracL Lhelr lnvesLmenLs or do no more Lhan malnLaln
LhemŦ ln Lhls caseţ LoLal spendlng and employmenL wlll decllneŦ lf wages fall less rapldly Lhan prlcesţ labourƌs real
wages wlll lncreaseţ and consumpLlon may rlseŦ lf lnvesLmenL ls aL leasL malnLalnedţ LoLal spendlng ln Lerms of
consLanL dollars wlll lncreaseţ Lhus lmprovlng employmenLŦ lf enLrepreneurs look upon Lhe shrlnklng proflL margln
as a danger slgnalţ howeverţ Lhey may reduce Lhelr lnvesLmenLsŤ andţ lf Lhe resulL ls a reducLlon ln LoLal spendlngţ
employmenL wlll fallŦ lf wages and prlces fall Lhe same amounLţ Lhere should be no change ln consumpLlon and
lnvesLmenLŤ andţ ln LhaL caseţ employmenL wlll remaln unchangedŦ 1he purchaslngŴpower Lheory lnvolves
psychologlcal conslderaLlons as well as Lhose LhaL may be measured more ob[ecLlvelyŦ WheLher lL can be used
effecLlvely Lo conLrol Lhe buslness cycle depends upon pollLlcal as well as economlc facLorsţ because governmenL
expendlLures are a parL of LoLal spendlngţ Laxes may affecL prlvaLe spendlngţ eLcŦ 1he appllcablllLy of Lhe Lheory ls Lo
Lhe whole economy raLher Lhan Lo Lhe lndlvldual flrmŦ
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 changedŦ 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 exlsLenceŦ Adam SmlLhţ ln 1he WealLh of naLlons/ (1776)ţ falled Lo
propose a deflnlLlve Lheory of wagesţ buL he anLlclpaLed several Lheorles LhaL were developed by oLhers laLerŦ SmlLh
LhoughL LhaL wages were deLermlned ln Lhe markeLplace Lhrough Lhe law of supply and demandŦ Workers and
employers would naLurally follow Lhelr own selfŴlnLeresLŤ labour would be aLLracLed Lo Lhe [obs where labour was
needed mosLţ and Lhe resulL would be Lhe greaLesL overall beneflL Lo Lhe workers and Lo socleLyŦ 8uL SmlLh gave no
preclse analysls of Lhe supply of and demand for labourŤ he dlscussed many elemenLs LhaL were lnvolved buL dld noL
weave Lhem lnLo a conslsLenL LheoreLlcal paLLernŦ

Subs|stence theory
lL emphaslzes Lhe supply aspecLs and neglecLs Lhe demand aspecLs of Lhe labour markeL Ŧ1hey hold LhaL change ln
Lhe supply of workers ls Lhe baslc force LhaL drlves real wages Lo Lhe mlnlmum requlred for subslsLenceŦ LlemenLs of
a subslsLence Lheory appear ln '1he WealLh of naLlons'ţ where Lhe wages pald Lo workers had Lo be enough Lo allow
Lhem Lo llve and Lo reproduce LhemselvesŦ SmlLh was more opLlmlsLlcţ howeverţ Lhan Lhe 8rlLlsh
classlcal economlsLsţ such as uavld 8lcardo and 1homas MalLhusţ who followed hlmţ for he lmplled LhaLŴŴaL leasL ln
an advanclng naLlonŸLhe wage level would have Lo be above subslsLence Lo permlL Lhe populaLlon Lo grow enough
Lo supply Lhe addlLlonal workers neededŦ 8lcardo malnLalned a more rlgld vlewŦ Pe wroLe LhaL Lhe ƍnaLural prlceƍ of
labour was Lhe prlce necessary Lo enable Lhe labourers Lo subslsL and Lo perpeLuaLe Lhe race wlLhouL lncrease or
dlmlnuLlonŦ 8lcardoƌs sLaLemenL was conslsLenL wlLh Lhe MalLhuslan Lheory of populaLlonţ whlch held LhaL
populaLlon ad[usLs Lo Lhe means of supporLlng lLŦ 1he markeL prlce of labour could noL vary from Lhe naLural prlce
for longť lf wages rose above subslsLenceţ Lhe number of workers would lncrease and brlng Lhe wage raLes downŤ lf
wages fell below subslsLenceţ Lhe number of workers would decrease and brlng Lhe wage raLes upŦ AL Lhe Llme LhaL
Lhese economlsLs wroLeţ mosL workers were acLually llvlng near Lhe subslsLence levelţ and populaLlon appeared Lo
be Lrylng Lo ouLrun Lhe means of subslsLenceŦ 1he subslsLence Lheory seemed Lo flL Lhe facLsŤ andţ 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 labourţ laLer wrlLers Lended Lo subscrlbe
Lo Lhe baslc ldea and noL Lo admlL excepLlonsŦ 1helr lnflexlble and lnevlLable concluslon earned Lhe Lheory Lhe name
ƍlron law of wagesŦƍ

WagesŴfund theory
1he demand for labour could noL lncrease excepL ln proporLlon Lo Lhe lncrease of Lhe funds desLlned for Lhe
paymenL of wagesŦ 8lcardo malnLalned LhaL an lncrease ln caplLal would resulL ln an lncrease ln demand for labourŦ
SLaLemenLs such as Lhese foreshadowed Lhe wagesŴfund Lheoryţ whlch held LhaL a predeLermlned fund of wealLh
exlsLed for Lhe paymenL of wagesŦ 1he slze of Lhe fund could be changed over perlods of Llmeţ buL aL any glven
momenL Lhe amounL was flxedţ and Lhe average wage could be deLermlned slmply by dlvldlng Lhe fund by Lhe
number of workersŦ SmlLh LhoughL of Lhe fund as surplus lncome of wealLhy menŴŴbeyond Lhe needs of Lhelr
famllles and LradeŴŴwhlch Lhey would use Lo employ oLhersŦ 8lcardo LhoughL of lL ln Lerms of caplLalŴŴfoodţ cloLhlngţ
Loolsţ raw maLerlalsţ machlneryţ eLcŦţ necessary Lo glve effecL Lo labourŦ 8egardless of Lhe makeup of Lhe fundţ Lhe
obvlous concluslon was LhaL when Lhe fund was large ln relaLlon Lo Lhe number of workersţ wages would be hlghŦ
When lL was relaLlvely smallţ wages would be lowŦ lf populaLlon lncreased Loo rapldly ln relaLlon Lo food and oLher
necesslLles (as ouLllned by MalLhus)ţ wages would be drlven Lo Lhe subslsLence levelŦ 1hereforeţ 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 demandsŦ Alsoţ lL followed LhaL leglslaLlon deslgned Lo ralse
wages would noL be successfulţ forţ wlLh only a flxed fund Lo draw uponţ lncreases galned by some workers could be
malnLalned only aL Lhe expense of oLhersŦ
1hls Lheory was generally accepLed for 30 years by economlsLsţ lncludlng such wellŴknown flgures as nassau Wllllam
Senlor and !ohn SLuarL MlllŦ WŦ1Ŧ 1hornLonţ lŦuŦ Longeţ and lrancls AŦ Walker were largely responslble for
dlscredlLlng Lhe Lheory durlng Lhe decade followlng 1863Ŧ 1hey polnLed ouL LhaL Lhe demand for labour was noL
deLermlned by a fund buL was derlved from Lhe consumer demand for producLsŦ 1he proponenLs of Lhe wagesŴfund
docLrlne had been unable Lo prove LhaL Lhere was a deLermlnaLe wage fundţ or any fund malnLalnlng a
predeLermlned relaLlonshlp wlLh caplLal or wlLh Lhe porLlon of Lhe proceeds of labourƌs producL pald ouL ln wagesŦ
AcLually Lhe amounL pald ouL depended upon a number of facLorsţ lncludlng Lhe bargalnlng power of labourŦ ?eLţ ln
splLe of Lhese Lelllng crlLlclsmsţ Lhe wagesŴfund Lheory conLlnued Lo exerclse an lmporLanL lnfluence unLll Lhe end of
Lhe 19
Lh
cenLuryŦ

,arx|an surp|usŴva|ue theory
karl accepLed 8lcardoƌs labour Lheory of valueţ buL he subscrlbed Lo a subslsLence Lheory of wages for
a dlfferenL reason Lhan LhaL glven by Lhe classlcal economlsLsŦ ln Marxƌs mlndţ lL was noL Lhe pressure of populaLlon
LhaL drove wages Lo Lhe subslsLence level buL raLher Lhe exlsLence of a large army of unemployedţ whlch he blamed
on Lhe caplLallsLsŦ Pe sLaLed LhaL Lhe exchange value of any producL was deLermlned by Lhe amounL of labour Llme
soclally necessary Lo creaLe lLŦ Pe held LhaL under Lhe caplLallsLlc sysLemţ labour was merely a commodlLy and could
geL only lLs subslsLenceŦ 1he caplLallsLţ howeverţ could force Lhe worker Lo spend more Llme on hls [ob Lhan was
necessary Lo earn hls subslsLenceţ and Lhe excess producLţ or surplus valueţ Lhus creaLedţ was Laken by Lhe
caplLallsLŦ lrom Lhe polnL of vlew of classlcal Lheoryţ Marxƌs argumenL appeared persuaslveţ alLhough Lhe Lerm
ƍlabour Llme soclally necessaryƍ hld some serlous ob[ecLlonsŦ 1he faLal blow came when Lhe labour Lheory of value
and Marxƌs subslsLence Lheory of wages were found Lo be lnvalldŦ WlLhouL Lhemţ Lhe surplusŴvalue Lheory collapsedŦ

1nL WAGL DL1Lk,INAN1S
numerous forces operaLe as wage deLermlnanLsŦ 1hese mlghL be roughly classlfled as economlcţ lnsLlLuLlonalţ
behavloralţ and equlLy conslderaLlonsŦ Wage declslons appear Lo be made by comparlson Lo labor markeLsţ so many
of Lhe deLermlnanLs appear Lo be economlcŦ 8oLh Lhe meanlng and force of economlc varlables are lnLerpreLed by
organlzaLlon declslon makersţ and Lhese deLermlnanLs are Lempered by lnsLlLuLlonalţ behavloralţ and eLhlcal
varlablesŦ 1here ls no doubL LhaL wage deLermlnanLs operaLe Lhrough labor markeLs and LhaL Lhey lnclude economlc
forcesŦ More proflLable organlzaLlons Lend Lo pay hlgher wages for Lhe same occupaLlons Lhan less proflLable
organlzaLlonsŦ CaplLalŴlnLenslve organlzaLlons Lend Lo be more proflLable because addlLlonal caplLal usually
lncreases producLlvlLyŦ Small organlzaLlons Lend Lo pay lower wages ofLen because Lhose wages are all Lhey can
affordŦ Servlce lndusLrles LhaL Lend Lo be laborŴlnLenslveţ lowŴproflLţ and lowŴwage are ofLen composed of small
organlzaLlonsŦ
Local labor markeLs vary ln wage levelsţ dependlng on lndusLrlal composlLlonŦ CommunlLles ln whlch a large
proporLlon of organlzaLlons are ln hlghŴproflL lndusLrles Lend Lo be hlghŴwage communlLles and ofLen have a hlgher
cosL of llvlngŦ CommunlLles wlLh a hlgh proporLlon of organlzaLlons ln lowŴproflL lndusLrles Lend Lo be lowŴwageŦ
SomeLlmes communlLles experlence shorLŴrun lncreases ln wage levels because labor demand lncreases compared
Lo labor supplyŤ or Lhere ls a decrease ln wage levels because of an lncrease ln labor supply wlLhouL a proporLlonal
lncrease ln demandŦ ulfferenLlals among local labor markeLs are llmlLed by a Lendency for workers Lo leave lowŴ
wage communlLles and for organlzaLlons Lo locaLe new planLs ln lowŴwage areasŦ unlons someLlmes aLLempL Lo
ellmlnaLe dlfferenLlals by maklng a concesslon ln work rules affecLlng producLlvlLyŦ Wage levels Lend Lo lncrease
fasLer ln good Llmesť proflLs lncrease and Lhls encourages workers Lo become more demandlng and moblleŦ unlons
relnforce Lhls Lendency by lnslsLlng on uslng galns made elsewhere Lo make Lhelr comparlsonsŦ Some less efflclenL
organlzaLlons survlve by paylng less and lowerlng sLandards of employablllLy even ln good LlmesŦ Plgh proflLsţ good
Llmes and lncreaslng producLlvlLy Lend Lo lncrease an organlzaLlonƌs wageŴpaylng ablllLyţ buL organlzaLlons may or
may noL be wllllng Lo pay hlgher wagesŦ Some of Lhem do so Lo slmpllfy recrulLlng problems and Lo foresLall
LurnoverŦ CLhers do so because aboveŴaverage proflLs wheL Lhe appeLlLes of workers and Lhelr unlonsŦ MosL
organlzaLlons Lend Lo adopL a poslLlon ln Lhe wage sLrucLure of Lhe communlLy and aLLempL Lo malnLaln LhaL
poslLlonŦ 1hus economlc forces operaLe on wage declslons Lhrough Lhe acLlons of declslon makersŦ lf declslon
makers belleve LhaL ad[usLmenLs ln wages are necessary or deslrable on economlc or oLher groundsţ Lhey make
LhemŦ lf Lhey belleve LhaL Lhe organlzaLlonƌs presenL wageŴpaylng poslLlon ls prudenL and accepLableţ Lhey do noLŦ
Wage level deLermlnanLs may be classlfled on Lhe basls ofť
(1) Lmployer ablllLy Lo payţ
(2) Lmployer wllllngness Lo Þayţ
(3) Lmployee (or poLenLlal employee) accepLanceŦ
AlLhough some of Lhese conslderaLlons have been used by arblLraLors and wage boardsţ llLLle ls known abouL how
Lhey are used by wageŴpaylng organlzaLlons or unlonsŦ lL ls Lherefore Lo emphaslze how and when Lhese
deLermlnanLs could be used by organlzaLlonsŦ
% L,9C¥Lk A8II1¥ 1C 9A¥
When asked mosL organlzaLlons would say LhaL Lhe ma[or deLermlnanL of Lhelr wage level ls whaL Lhe markeL ls
paylngŦ Poweverţ Lhere ls usually a caveaL Lo Lhls and LhaL ls Lhelr sLaLemenL ƍlf we can afford lLŦƍ 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 deslreŦ 1hls ls expressed ln surveys LhaL ask
abouL whaL deLermlnes Lhe organlzaLlonƌs wage levelŦ When Lhese organlzaLlons say ƍlf Lhey can afford lLƍ Lhey are
lnvoklng Lhe ablllLy Lo payŦ Poweverţ Lhere ls llLLle LhaL explalns exacLly whaL Lhe ablllLy Lo pay lsŦ As reporLedţ more
proflLable flrms Lend Lo pay hlgher wagesţ wheLher Lhelr proflLablllLy ls based on Lhe producL markeLţ Lechnlcal
efflclencyţ managemenL ablllLyţ slzeţ or some oLher facLorŦ 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 survlveŦ 1hls has been parLlcularly hard slnce Lhe lndusLry ls hlghly unlonlzedŦ
ln a very real senseţ wage deLermlnaLlon by Lhe organlzaLlon ls an assessmenL of lLs ablllLy Lo payŦ 1he welghL
aLLached Lo oLher wage deLermlnanLs may be deLermlned by Lhls esLlmaLeŦ Wages are labor cosLs Lo employersţ and
Lhese cosLs are hlgh or low dependlng on whaL Lhe employer geLs for Lhe wage Ÿ Lhe resulLs of efforLŦ WhaL Lhe
employer acLually pays ls labor cosL per unlL of ouLpuLŤ Lhls ls Lhe wage cosLs dlvlded by Lhese resulLs Ÿ Lermed
producLlvlLyŦ A prospecLlve wage lncrease may or may noL lncrease labor cosL per unlLţ dependlng on anLlclpaLed
changes ln producLlvlLyŦ A wage lncrease LhaL would be offseL by lncreases ln producLlvlLy does noL lncrease labor
cosLs and meeLs Lhe requlremenL of ablllLy Lo payŦ A wage lncrease LhaL lncreases labor cosLsţ howeverţ requlres
deLermlnlng wheLher Lhe lncrease can be passed on Lo cusLomers or offseL by a reducLlon ln oLher cosLsŦ Success ln
elLher efforL agaln meeLs Lhe requlremenLs of ablllLy Lo payŦ
Slmllarlyţ a unlon presumably aLLempLs Lo esLlmaLe an organlzaLlonƌs ablllLy Lo pay before maklng lLs demandsŦ Plgh
currenL proflLs or favorable fuLure prospecLs slgnal ablllLy Lo pay and sLrengLhen Lhe unlonƌs bargalnlng powerŦ
unlons have a very long hlsLory and some early unlon conLracLs Lled wages Lo ablllLy Lo payŦ lor exampleţ a 1919
prlnLlng agreemenL Lled wages Lo economlc condlLlons ln Lhe lndusLryŦ ConLracLs coverlng moLlon plcLure operaLors
have based wages on Lhe seaLlng capaclLy of LheaLersŦ Coal lndusLry agreemenLs have Lled wages Lo Lhe producLlvlLy
of coal fleldsŦ SlldlngŴscale agreemenLs have geared wages Lo selllng prlces Ŧ8oLh Lhe unlLed SLeelworkers and Lhe
unlLed AuLo Workers aLLempLed (unsuccessfully) Lo secure agreemenLs Lylng prospecLlve wage lncreases ln Lhelr
lndusLrles Lo company proflLsŦ lL ls noL llkely Loday LhaL Lhls would be seen by Lhe workers as a good bargalnŦ
AlLhough employers profess Lo use ablllLy Lo pay (or lnablllLy Lo pay) as a wage deLermlnanLţ llLLle ls known abouL
how Lhey measure lLŦ An early sLudy found a number of organlzaLlons LhaL esLlmaLed ablllLy Lo pay by lnserLlng a
pro[ecLed wage lncrease lnLo Lhe laLesL lncome sLaLemenLŦ ƍ1he ablllLy of a flrm Lo pay a glven level of wages or Lo
fund a wage lncrease whlle remalnlng proflLableŦ CrganlzaLlons probably reacL Lo Lhe ablllLy Lo pay when Lhey
percelve Lhelr ablllLy ls ln dangerŦ LxecuLlves are more llkely Lo brlng Lhe ablllLy Lo pay up ln wage dlscusslons Lhan
are compensaLlon experLsŦ lurLherţ lowerlng wages and oLher meLhods of reduclng cosLs are more llkely Lo be
percelved as falr ln bad economlc LlmesŦ
LxacLly how organlzaLlons measure Lhelr ablllLy Lo pay ls someLhlng of a mysLeryŦ Poweverţ Lhe way ln whlch
organlzaLlons use wage surveys suggesLs LhaL Lhey do so ln a varleLy of waysŦ CrganlzaLlons ofLen say Lhey use wage
surveys Lo evaluaLe Lhelr ablllLy Lo payŦ lf by evaluaLe Lhey mean deLermlneţ Lhls would be somewhaL surprlslngţ
because surveys would loglcally reflecL wllllngness Lo payŦ 1hls suggesLs LhaL wllllngness Lo pay ls a more lmporLanL
deLermlnanL for organlzaLlonsŦ AcLuallyţ ablllLy Lo pay ls a composlLe of Lhe economlc forces faclng a flrmŦ As suchţ lL
lnvolves declslons on how proflLs should be measuredţ agalnsL whaL sLandard (neL worLh or sales)ţ and over whaL
perlodŦ lL also lnvolves deLermlnlng an approprlaLe raLe of reLurn and resolvlng Lhe lssuesţ such as producL
developmenLţ producL mlxţ and prlclng pollcyţ LhaL mosL affecL proflLsŦ 1hese conslderaLlons lllusLraLe LhaL alLhough
employlng organlzaLlons and unlons may clLe ablllLy Lo pay or lnablllLy Lo pay as a prlmary reason for wage
declslonsţ no one suggesLs LhaL lL be used as Lhe sole deLermlnanLŦ Such a sLrlcL appllcaLlon of ablllLy Lo pay could
lead Lo very undeslrable resulLsŦ lL wouldţ for exampleţ compleLely dlsorganlze wage relaLlonshlpsŦ Wage levels
would bear no relaLlonshlp Lo Lhe golng raLe ln Lhe labor markeLŦ CrganlzaLlons ln Lhe same lndusLry could have
vasLly dlfferenL wage levelsŦ Wages would flucLuaLe wldely along wlLh proflLsŦ Any semblance of lndusLry wage
unlformlLy (usually sLrongly deslred by unlons) would dlsappearŦ LowŴproflL flrms employlng a hlgh proporLlon of
hlghly skllled people could have lower wage levels Lhan hlghŴproflL flrms employlng only unskllled laborŦ ln Lhls wayţ
unskllled labor could recelve hlgher wages Lhan hlghly skllled laborŦ SLrong llmlLsţ moreoverţ would be placed on
economlc efflclencyŦ under a sysLem whereln lncreases ln proflLs are absorbed by wagesţ an efflclenL managemenL
would have noLhlng Lo galn from lncreased efforL and lnefflclenL managemenL would be subsldlzed by low wagesŦ ln
addlLlonţ employees could noL leave lnefflclenL organlzaLlons for more efflclenL onesţ because expanslon of ouLpuL
and employmenL ln efflclenL flrms would be foresLalled by Lhe paylng ouL of lncreased proflLs ln wages Lo presenL
employeesŦ lncenLlves for managemenL Lo lmprove efflclency would be serlously lmpalredŦ ÞosslblllLles of expanslon
would be llmlLedŦ
lor Lhese reasonsţ sLrlcL appllcaLlon of ablllLy Lo pay ls llkely Lo hold llLLle aLLracLlon for Lhe parLlesŦ Cn Lhe oLher
handţ Lhe general economlc envlronmenL of Lhe economyţ Lhe lndusLryţ and Lhe flrm ls lmporLanL ln wage
deLermlnaLlonŦ When Lhe demand for Lhe producL or servlce of an organlzaLlon ls sLrongţ when poLenLlal employees
are relaLlvely scarceţ and when prlces can be lncreased wlLhouL reducLlon ln salesţ unlons are llkely Lo polnL Lo
ablllLy Lo payţ placlng managemenL ln a poor poslLlon Lo plead lnablllLy Lo payŦ When economlc condlLlons faclng Lhe
lndusLryţ or especlally Lhe organlzaLlonţ are unfavorableţ managemenL esLlmaLes of lnablllLy Lo pay may seL a low
llmlL Lo wage lncreasesŦ unlon reacLlons Lo slLuaLlons ln whlch a company faces flnanclal hardshlp are pragmaLlcť
alLhough Lhey are sLrongly opposed Lo subsldlzlng lnefflclenL organlzaLlonsŦ Whlle organlzaLlons reporL uslng ablllLy
Lo pay as a wage deLermlnanL ln collecLlve bargalnlngţ such use ls sub[ecL Lo sLrongly held oplnlonsŦ MosL unlon
leaders conslder ablllLy Lo pay as lrrelevanL unless hlgh proflLs are apparenLŦ MosL employers conslder lL no buslness
of Lhe unlonŦ 1he force of ablllLy Lo pay ls probably besL seen aL Lhe exLremesţ ln [udglng wheLher a wage
ad[usLmenLţ apparenLly [usLlflable on oLher groundsţ can or cannoL be meLŦ SLrong evldence of favorable prospecLs
causes employers Lo have less reslsLance Lo prospecLlve lncreases ln wage levelsŦ Slmllarlyţ sLrong evldence of
unfavorable prospecLs reduces pressure for a wage lncreaseţ especlally lf lL ls feared LhaL such a wage ad[usLmenL
mlghL cause loss of [obsţ and greaLly lncreases employer reslsLanceŦ
AblllLy Lo pay ls an expresslon of Lhe economlc forces LhaL bear on wage deLermlnaLlonŦ AlLhough lL ls a deLermlnanL
beseL by measuremenL and forecasLlng problemsţ search Lheory suggesLs LhaL organlzaLlons are able Lo esLlmaLe lL
when a declslon calls for lLŦ

ÞroducLlvlLy
ÞroducLlvlLy refers Lo a comparlson beLween Lhe quanLlLy of goods or servlces produced and Lhe quanLlLy of
resources employed ln Lurnlng ouL Lhese goods or servlcesŦ lL ls Lhe raLlo of ouLpuL Lo lnpuLŦ 8uL ouLpuL can be
compared wlLh varlous klnds of lnpuLsť hours worked Lhe LoLal of labor and caplLal lnpuLsţ or someLhlng ln beLweenŦ
1he resulLs of Lhese dlfferenL comparlsons are dlfferenLţ as are Lhelr meanlngsŤ dlfferenL comparlsons are
approprlaLe Lo dlfferenL quesLlonsŦ 1wo maln concepLs and measuremenLs of producLlvlLy are usedţ buL for dlfferenL
purposesŦ 1he flrsLţ ouLpuL per hours worked or labor producLlvlLyţ answers quesLlons concernlng Lhe effecLlveness
of human labor under Lhe varylng clrcumsLances of labor quallLyţ amounL of equlpmenLţ sale of ouLpuLţ meLhods of
producLlonţ and so onŦ 1he secondţ ouLpuL per unlL of caplLal and labor (LoLal facLor producLlvlLy)ţ measures Lhe
efflclency of labor and caplLal comblnedŦ 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 Lechnologyţ slzeţ characLer of economlc
organlzaLlonţ managemenL sklllsţ and many oLher deLermlnanLsŦ lL ls more complex and more llmlLed ln useŦ
1he flrsL measureţ ouLpuL per hours workedţ ls Lhe approprlaLe measure Lo employ ln wage quesLlonsŦ lL reflecLs Lhe
comblned effecL of changes (1) ln Lhe efflclency wlLh whlch labor and caplLal are usedţ (2) ln Lhe amounL of Langlble
caplLal employed wlLh each hour of laborţ and (3) Lhe average quallLy of laborŦ lL ls Lhese Lhree facLors LhaL have
been found Lo besL explaln Lhe longŴLerm Lrend ln Lhe general level of real wagesŦ
lL should be emphaslzed LhaL labor producLlvlLy measures Lhe conLrlbuLlons noL [usL of labor aloneţ buL of all Lhe
lnpuL facLorsŦ lnfacLţ Lhe poLenLlal for esLlmaLlng Lhe conLrlbuLlon of varlous facLors makes measures of labor
producLlvlLy aL varlous levels approprlaLeţ or lnapproprlaLeţ for use as wage sLandardsŦ
&Cutput per hours worked&Ŧ
CuLpuL per hours worked can be measured aL Lhe [obţ planLţ lndusLryţ or economy levelŦ AL Lhe [ob levelţ lL ls
posslble Lo measure worker appllcaLlon and efforL separaLely from oLher lnpuLs as Lhe basls for lncenLlve plansŦ
AL Lhe planL levelţ esLlmaLes of Lhe source of producLlvlLy lncreases can be used as Lhe basls of galnsharlng plansŦ
AL Lhe lndusLry levelţ producLlvlLy lmprovemenLs cannoL be Lraced separaLely Lo Lhe behavlor of workersţ managersţ
or lnvesLors ln Lhe lndusLryŦ 1he conLrlbuLlons of one lndusLry Lo anoLher lndusLryƌs producLlvlLy cannoL be
separaLedŦ 1herefore Lhe use of lndusLry producLlvlLy as a wage deLermlnanL would have adverse economlc
consequencesŦ lor Lhese reasonsţ lndusLry producLlvlLy ls seldom suggesLed as a wage deLermlnanLŦ

PlsLorlcallyţ aL Lhe level of Lhe economyţ changes ln labor producLlvlLy have been used as approprlaLe for wage
deLermlnaLlonŦ ln facLţ Lhe lmprovemenL facLor ln labor conLracLs employed ln Lhe auLomoblle lndusLry from 1948
unLll Lhe early 1980s ls an example of such a useŦ 1hen ln Lhe 1960's wageŴprlce guldeposLs were based on Lhe
argumenL LhaL wage lncreases ln organlzaLlons should be deLermlned by economyŴwlde advances ln producLlvlLyŦ
Poweverţ Lhls formula use of producLlvlLy for wage deLermlnaLlon has advocaLes and opponenLsŦ AdvocaLes polnL
ouL LhaL lncreaslng wage levels ln speclflc organlzaLlonsţ ln accordance wlLh annual lncreases ln producLlvlLy ln Lhe
economyţ lnsures LhaL producLlvlLy galns geL dlsLrlbuLedŦ 1hey also argue LhaL dlsLrlbuLlng Lhese galns Lhrough prlce
reducLlons may conLrlbuLe Lo economlc lnsLablllLyŦ
CpponenLs polnL ouL LhaL alLhough Lhere ls a longŴLerm relaLlonshlp beLween producLlvlLy and wagesţ Lhe shorLŴ
Lerm relaLlonshlp ls hlghly varlableţ whlch suggesLs LhaL oLher wageŴdeLermlnlng forces are more perLlnenLŦ 1hey
also argue LhaL Lylng wages Lo producLlvlLy ylelds sLable prlces only when producLlvlLy lncreases are accepLed as a
llmlL Lo wage lncreasesŦ Cbvlouslyţ when Lhe cosL of llvlng ls lncreaslngţ llmlLlng wage lncreases Lo producLlvlLy
lncreases would be unpalaLable Lo employeesŦ Lven more unaccepLable would be wage cuLs when economyŴwlde
producLlvlLy decllnesţ as has someLlmes occurredŦ
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 feaslbleŦ lncreases ln lndusLry producLlvlLyţ for exampleţ
may be hlgherţ buL lndusLry lndexes are less rellable and more varlableŦ Such lndexes may also conceal Lhe
conLrlbuLlon of one lndusLry Lo anoLherƌs producLlvlLyŦ Lven lndexes of naLlonal producLlvlLy may oversLaLe nonŴ
lnflaLlonary wageŴlncrease posslblllLlesţ by falllng Lo measure Lhe effecLs of Lransfers of workers from lowerŴ Lo
hlgherŴproducLlvlLy lndusLrles and oLher sources of lncrease ln labor quallLyŦ Þerhaps enough problems have been
clLed Lo argue agalnsL ralslng wages ln sLrlcL accordance wlLh producLlvlLy lncreasesŦ 1he dlfflculLy of securlng
accepLance of wage lncreasesţ based on naLlonal producLlvlLy as a llmlLţ argues agalnsL Lhe use of such a formulaŦ
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 conslderaLlonsŦ PlgherŴproducLlvlLy lndusLrles would
be penallzed for Lhelr hlgher producLlvlLyţ and Lhls would harm Lhe economyŦ
ÞroducLlvlLyţ howeverţ may be lnLerpreLed Lo mean LhaL lncreases ln labor producLlvlLy aL consLanL wages lower
labor cosL per unlLŦ 1hls operaLes Lhrough ablllLy Lo payŦ ÞroducLlvlLy may also be employed ln Lhe narrower sense Ÿ
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)Ŧ AlLhough producLlvlLy lncreases are ofLen menLloned ln wage
level deLermlnaLlonţ especlally ln labor negoLlaLlonsţ Lhelr effecL as a separaLe conslderaLlon ls probably mlnlmumŦ

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

|% Comparab|e Wages
Comparable wages consLlLuLeţ wlLhouL a doubLţ Lhe mosL wldely used wage deLermlnanLŦ 1hey represenL Lhe way ln
whlch organlzaLlons achleve Lhe compensaLlon goal of belng compeLlLlveŦ noL only are Lhe wages and salarles of
governmenL employees keyed dlrecLly Lo comparable wages ln labor markeLsţ buL also Lhose of mosL publlc
employees ln oLher [urlsdlcLlonsŦ Alsoţ unlons emphaslze ƍcoerclve comparlsonsţƍ and prlvaLe organlzaLlons
consclously Lry Lo keep up wlLh changes ln golng wagesŦ Þerhaps Lhe ma[or reason for Lhls wldespread use of Lhe
concepL of comparable wages ls lLs apparenL falrnessŦ ln Lhls vlewţ comparable wages help ln Lhe aLLracLlon and
reLenLlon goals of compensaLlonŦ 1o mosL peopleţ an accepLable deflnlLlon of falr wages ls Lhe wages pald by oLher
employers for Lhe same Lype of workŦ Lmployers flnd Lhls deflnlLlon reasonable because lL lmplles LhaL Lhelr
compeLlLors are paylng Lhe same wagesŦ ln essence Lhenţ labor cosLs become even across Lhe lndusLryŦ AnoLher
reason for Lhe popularlLy of Lhe concepL ls lLs apparenL slmpllclLyŦ AL flrsL glanceţ lL appears qulLe slmple Lo ƍpay Lhe
markeLŦƍ
Poweverţ Lhls llluslon of slmpllclLy vanlshes once we Lry Lo ƍdeLermlne Lhe markeL raLeŦƍ Þreclse Lechnlquesţ
carefully employedţ are requlred Lo flnd comparable [obs and comparable wage or salary raLesŦ numerous declslons
musL be made on whlch organlzaLlons and whlch [obs should be comparedţ and how besL Lo compare LhemŦ Lqually
lmporLanL are declslons concernlng how Lo analyze Lhe daLa and use LhemŦ Wage comparlsons may lnvolve oLher
organlzaLlons ln Lhe area or ln Lhe lndusLryţ wherever locaLedŦ An lmporLanL quesLlon Lo conslder ls wheLher
dlfferences ln compeLlLlve condlLlons ln Lhe producL markeL are slgnlflcanL enough Lo warranL a dlfferenL wage levelţ
regardless of laborŴmarkeL lnfluencesŦ
1he golng wage ls an absLracLlonţ Lhe resulL of numerous declslons on whaL [obs and organlzaLlons Lo lncludeţ whaL
wage lnformaLlon ls approprlaLeţ and whaL sLaLlsLlcal meLhods Lo employŦ Some employers declde Lo pay on Lhe
hlgh slde of Lhe markeLţ oLhers on Lhe low slde Ŧ 1he resulL ls a range of raLes Lo whlch varlous sLaLlsLlcal measures
may be applledŦ varlous lnLerpreLaLlons of Lhe golng raLe may be made and [usLlfledŦ 1o rely on comparable wages
as a wage deLermlnanL ls Lo rely on wages as lncome raLher Lhan as cosLsŦ Comparable wage raLes may represenL
enLlrely dlfferenL levels of labor cosLs ln Lwo dlfferenL organlzaLlonsŦ SeLLlng wage levels sLrlcLly on Lhe basls of golng
wages could lmpose severe hardshlps on one organlzaLlon buL a much lower labor cosL on anoLherŦ 1hese dlfflculLles
are noL lnsurmounLableť many employers lean heavlly on wage and salary surveysŦ Lmployer cholces on whaL
surveys Lo acqulre and useţ whaL benchmark [obs Lo aLLend Loţ and how Lo analyzeţ lnLerpreLţ and use Lhe daLa
suggesL LhaL reasonable accommodaLlons Lo ƍLhe markeLƍ are usually posslbleŦ
ln addlLlon Lo offerlng a cerLaln measurablllLyţ followlng comparable wages conLalns a good deal of economlc
wlsdomŦ Wages are prlcesŦ Cne funcLlon of prlce ln a compeLlLlve economy ls Lhe allocaLlon of resourcesŦ use of
comparableŴwage daLa operaLes roughly Lo allocaLe human resources among employersŦ lurLhermoreţ comparlsons
slmpllfy Lhe Lask of declslon makers and negoLlaLorsŦ Cnce approprlaLe comparlsons are declded uponţ dlfflculLles
are mlnlmlzedŦ A wage level can be seL where Lhe wage becomes saLlsfacLory as lncome and operaLes reasonably
well ln lLs allocaLlon funcLlonŦ Wages as cosLs are also saLlsfled because unlL labor cosLs can dlffer wldely beLween
Lwo organlzaLlons havlng ldenLlcal wage raLesŤ also unlL labor cosLs can be ldenLlcal ln Lwo organlzaLlons havlng
wldely dlfferenL wage raLesŦ Comparable wages also operaLe as a force for generallzlng changes ln wage levelsţ
regardless of Lhe source of changeŦ unforLunaLelyţ howeverţ alLhough changes ln golng wages Lell whaL occurredţ
Lhey donƌL Lell why lL occurredŦ 1he changes may represenL lnsLlLuLlonalţ behavloralţ or eLhlcal conslderaLlons more
Lhan economlc onesŦ
Cn balanceţ howeverţ comparable wages probably operaLe as a conservaLlve forceŦ 8ecause wage declslons lnvolve
fuLure cosLsţ employers are undersLandably unwllllng Lo ouLdlsLance compeLlLorsŦ ln a LlghL labor markeLţ changes ln
golng wages may compel an organlzaLlon Lo pay more Lo geL and keep a labor forceţ especlally of crlLlcal sklllsŦ 8uL ln
more normal perlodsţ where unemploymenL exceeds [ob vacanclesţ employers wlll more llkely focus on equallzlng
Lhelr labor cosLs wlLh Lhose of producLŴmarkeL compeLlLorsŦ ln oLher wordsţ comparable wages are followed as long
as oLher conslderaLlons are noL more compelllngŦ

||% Cost of |v|ng
CosL of llvlng ls emphaslzed by workers and Lhelr unlons as a wage level conslderaLlon when lL ls rlslng rapldlyŦ ln
such Llmesţ Lhey pressure employers Lo ad[usL wages Lo offseL Lhe rlseŦ ln parLţ Lhese demands represenL a plea for
lncreases Lo offseL reducLlons ln real wages (wages dlvlded by Lhe cosL of llvlng)Ŧ Wage pressures resulLlng from
changes ln Lhe cosL of llvlng flucLuaLe wlLh Lhe rapldlLy wlLh whlch llvlng cosLs rlseŤ howeverţ prlce rlses ln mosL
years have produced employee expecLaLlons of aL leasL annual pay lncreasesŦ 1o employees a saLlsfacLory pay plan
musL reflecL Lhe effecL of lnflaLlon on flnanclal needsŦ 1hls can come lnLo confllcL wlLh Lhe currenL emphasls on
varlable payŦ
Lmployers undersLandably reslsLţ or shouldţ lncreaslng pay levels on Lhe basls of lncreases ln Lhe cosL of llvlng unless
changes ln compeLlLlve wages and/or producLlvlLy fully reflecL Lhese changesţ whlch Lhey seldom doŦ lncreases ln
Lhe cosL of llvlng are parLlally LranslaLed lnLo wage lncreases by mosL employers Lhrough paymenL of comparable
wagesţ and longŴLerm conLracLs wlLh unlons have fosLered oLher meLhods of lncorporaLlng cosLŴofŴ llvlng changesŦ ŴŴ
Cne such meLhod ls Lhe reopen|ng c|auseţ whlch permlLs wages Lo be renegoLlaLed durlng a longŴLerm conLracLŦ
AnoLher ls Lhe deferred wage lncreaseť an aLLempL Lo anLlclpaLe economlc changes aL Lhe Llme Lhe conLracL ls
slgnedŦ 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 llvlngŦ ln Lhls Lhlrd meLhodţ llvlngŴcosL changes are measured by changes ln Lhe Consumer
Þrlce lndexŦ
LscalaLor clauses vary ln popularlLy from year Lo year ln accordance wlLh Lhe rapldlLy of cosLŴofŴllvlng changes durlng
Lhe perlod lmmedlaLely precedlng Lhe slgnlng of Lhe conLracL and wlLh anLlclpaLlon of subsequenL rlsesŦ ln Lhe pasLţ
as much as 60 percenL of workers under large unlon conLracLs have been covered by escalaLor clausesŦ Þerlods of
reduced lnflaLlon Lend Lo reduce Lhelr popularlLyŦ 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 doŦ MosL organlzaLlons would clalm LhaL Lhey
granL merlL pay lncreases each yearŦ Poweverţ when all or almosL all employees geL Lhe same lncrease lL looks more
llke a cosLŴofŴllvlng ad[usLmenLŦ ln exLreme condlLlonsţ such as Lhe laLe 1970s doubleŴdlglL lnflaLlonţ organlzaLlons
were prompLed Lo make slgnlflcanL cosLŴofŴllvlng ad[usLmenLsŦ
Lmploylng Lhe cosL of llvlng as a wageŴlevel deLermlnanL ls somewhaL conLroverslalŦ Wage raLes do Lend Lo follow
changes ln Lhe cosL of llvlng ln Lhe shorL runŦ 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 devaluedŦ 8uL uslng Lhe cosL of llvlng as a
deLermlnanL also lmplles a consLanL sLandard of llvlngŦ PlsLorlcallyţ unlons have opposed Lhe prlnclple for Lhls
reasonŦ MeLhods LhaL provlde Lhe same absoluLe cosLŴofŴllvlng ad[usLmenL for all employees may acLually lmpalr
falrness Lo employeeŦ Such flaL ad[usLmenLs lmply LhaL everyoneƌs cosL of llvlng ls Lhe same and has changed by Lhe
same amounLŦ unforLunaLelyţ Lechnlcal problems ln measurlng changes ln Lhe cosL of llvlng may make such effecLs
lnequlLableŦ


|||% Cost of |v|ng and Average Wage
A cosLŴofŴllvlng lndex measures changes overLlme ln Lhe prlces of a consLanL bundle of goods and servlcesŦ 1he
bundle of goods and servlces (called a markeL baskeL) ls obLalned by asklng a groupţ whose cosL of llvlng ls Lo be
measuredţ Lo keep a record of Lhe prlce of Lhelr purchasesŦ 1hese daLa are Lhen used Lo creaLe Lhe lndexŦ
1he kenya naLlonal 8ureau of SLaLlsLlcs (kn8S) has been publlshlng such an lndex slnce 1921ţ called Lhe Consumer
Þrlce lndex Ŧ1he CÞl was developed Lo measure Lhe cosL of llvlng for famllles of urban wage earnersŦ As suchţ lL
became Lhe basls of escalaLor clauses ln unlon conLracLsŦ Llke any general lndexţ Lhe CÞl ls an absLracLlon LhaL rarely
corresponds wlLh Lhe acLual llvlngŴcosL changes for any glven famllyŦ lamlly consumpLlon paLLerns dlffer due Lo ageţ
lncomeţ composlLlonţ LasLesţ and oLher characLerlsLlcsŦ 1hese dlfferences mean LhaL Lhe CÞl varles greaLly ln lLs
ablllLy Lo measure cosLŴofŴllvlng changes for varlous groupsŦ Moreoverţ consumpLlon paLLerns change over Llmeţ as
does Lhe quallLy of producLsŦ
AL presenLţ Lwo lndexes are publlshedť Lhe CÞlŴu and Lhe CÞlŴWŦ 1he CÞlŴu represenLs all urban households
lncludlng urban workers ln all occupaLlonsţ Lhe unemployedţ and reLlred personsŦ 1he CÞlŴW represenLs urban wage
and clerlcal workers employed ln blueŴcollar occupaLlonsŦ 8oLh CÞl measures exclude rural householdsţ mlllLary
personnelţ and persons ln lnsLlLuLlonallzed houslng such as prlsonsţ old age homesţ and longŴLerm hosplLal careŦ 1he
kn8S has made changes Lo lmprove Lhe lndex over Llme and Lo meeL speclflc problemsŦ 1he laLesL change Lo boLh
lndexes lnvolved subsLlLuLlng a renL equlvalenL for home ownershlpŦ unLll Lhe early 1980sţ Lhe CÞl used whaL ls
called Lhe asseL prlce meLhod Lo measure Lhe change ln Lhe cosLs of ownerŴoccupled houslngŦ 1he asseL prlce
meLhod LreaLs Lhe purchase of an asseLţ such as a houseţ as lL does Lhe purchase of any consumer goodŦ 8ecause
Lhe asseL prlce meLhod can lead Lo lnapproprlaLe resulLs for goods LhaL are purchased largely for lnvesLmenL
reasonsţ Lhe CÞl lmplemenLed Lhe renLal equlvalence approach Lo measurlng prlce change for ownerŴoccupled
houslngŦ
Cbvlouslyţ such Lechnlcal problems mean LhaL Lylng wage levels Lo Lhe CÞl varles ln falrness Lo dlfferenL groupsŦ
Moreoverţ aL leasL ln unlons and perhaps ln mosL organlzaLlonsţ falrness seems Lo suggesL Lhe same cosLŴofŴllvlng
ad[usLmenL for everyoneŦ A compressed wage sLrucLure resulLlng from flaL cosLŴofŴllvlng lncreases may produce
dlfflculLles ln recrulLlng and keeplng hlgherŴlevel employeesŦ lL seems LhaL changes ln Lhe cosL of llvlng do noL closely
parallel changes ln Lhe supplyŴdemand slLuaLlon of any speclflc employee groupŦ Alsoţ parLlcular organlzaLlons and
lndusLrles may face compeLlLlve slLuaLlons ln producL markeLs LhaL run counLer Lo changes ln llvlng cosLsŦ lL also
seems LhaL wage lncreases LhaL fully reflecL llvlngŴcosL lncreases bulld lnflaLlon lnLo Lhe economyŦ lorLunaLelyţ
alLhough escalaLor clauses narrow Lhe Llme gap beLween prlce and wage changes ln an lnflaLlonary perlodţ Lhey
have been found Lo yleld only abouL 37 percenL of a yearƌs lnflaLlonţ and Lhey apply Lo only abouL Len percenL of
nonagrlculLural employmenLŦ
ln summaryţ Lhe cosL of llvlng as a wage level deLermlnanL usually operaLes lndlrecLlyŦ AlLhough aLLracLlve Lo
employeesţ unlonsţ and some employlng organlzaLlons ln perlods of rapldly rlslng prlcesţ lL should never be used as
Lhe sole sLandard of wage ad[usLmenLŦ When lnfluences ln Lhe labor markeL are sLronger Lhan Lhose ln Lhe producL
markeLţ cosLŴofŴllvlng conslderaLlons may lncrease an employerƌs wllllngness Lo payŦ 8uL when an employer ls faced
wlLh sLrong compeLlLlon ln Lhe producL markeLţ employees may have Lo choose beLween malnLalnlng Lhelr real
wages and malnLalnlng Lhelr [obsŦ ln lnflaLlonary perlodsţ Lhe cosL of llvlng relnforces golng wages Lhrough employer
wllllngness Lo payŦ

|v% abor Supp||es
Cne conslderaLlon always presenL ln wage level deLermlnaLlon ls Lhe compensaLlon goal of obLalnlng and reLalnlng
an adequaLe work forceŦ 1he wage level musL be sufflclenL Lo perform Lhls funcLlon or Lhe organlzaLlon cannoL
operaLeŦ LffecLlveness of recrulLmenL efforLsţ refusal Lo offer raLesţ and labor Lurnover levels may each be
consldered ln wage level declslonsŦ 1he wage level lLself ls only one deLermlnanL LhaL effecLs recrulLmenL
effecLlveness and labor LurnoverŦ 8uL lL ls an lmporLanL one ln LhaL lL ls usually agreed Lo be Lhe ma[or elemenL ln
[ob cholceŦ Changlng economlc condlLlons can have a rapld change ln demand for cerLaln sklllsŦ 1hls creaLes a
shorLage of avallable workers wlLh Lhose sklllsţ as supply does noL change as rapldlyŦ Cne such change occurred
when lnLeresL raLes fell and mosL home owners elecLed Lo reŴflnance Lhelr homesţ on Lop of colncldlng hlgh sales of
homesŦ 1hls creaLed an lmmedlaLe hlgh demand for MorLgage Loan ÞrocessorsŦ CrganlzaLlons were faced wlLh
ralslng wages for Lhese workers far above equlvalenL [obs ln Lhelr organlzaLlonsŦ lurLherţ organlzaLlons engaged ln
Lralnlng people for Lhese [obsŦ 1hen Lwo Lhlngs happenedŦ llrsL Lhe supply began Lo caLch up wlLh Lhe demandŦ 1hen
Lhe real esLaLe markeL slumped and lnLeresL raLes wenL upţ meanlng Lhe demand for MorLgage Loan Þrocessors fellţ
leavlng organlzaLlons wlLh a group of overpald employeesŦ lfţ howeverţ an organlzaLlon experlences no recrulLmenL
or Lurnover problemsţ lL may presume LhaL Lhe presenL wage level ls adequaLe Lo permlL securlng and holdlng a
labor forceŦ 8uL quallLy lssues may sLlll arlseŦ ls Lhe quallLy of Lhe labor force belng malnLalnedţ 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
quanLlLyŦ 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 cosLsŦ lf an employer can lower
unlL labor cosLs by ralslng Lhe wage level and sLandards of employablllLyţ such a course would deserve careful
conslderaLlonŦ 1hls approach parLlally explalns Lhe exlsLence of wage leadersŦ CrganlzaLlons LhaL pay ƍon Lhe hlgh
sldeƍ may do so ln Lhe hope of aLLracLlng a hlgherŴquallLy labor forceŦ Wage leadershlp may noL only permlL
ƍsklmmlng Lhe creamƍ off Lhe presenL labor forceţ lL may ensure a conLlnulng supply of hlghŴquallLy personnel from
new enLranLsŦ Wage leadershlp companles ofLen have a walLlng llsL of appllcanLsţ whereas oLhers musL conLlnually
use an aggresslve recrulLmenL programŦ
Wage level declslons based on laborŴsupply conslderaLlons musL be made ln llghL of Lhe prospecLs of Lhe
organlzaLlon and Lhe lndusLryŦ llrms ln decllnlng lndusLrles may be forced Lo allow wage levels Lo drop wlLh reduced
producLlvlLy and Lo plan on less efflclenL and lowerŴpald work forcesŦ An expandlng organlzaLlonţ on Lhe oLher handţ
may wanL Lo upgrade Lhe quallLy of lLs work force by paylng above Lhe markeL and ralslng sLandards of
employablllLyŦ 1he exLenL Lo whlch laborŴsupply conslderaLlons affecL wage levels varles greaLly among
organlzaLlonsŦ CrganlzaLlons ln hlghŴwage lndusLrles ln lowŴwage areas experlence few laborŴsupply problemsŤ
Lhose ln lowŴwage lndusLrles may face serlous laborŴsupply problemsŦ AlLhough mosL organlzaLlons flll mosL of Lhelr
[obs from wlLhlnţ lL ls doubLful LhaL any organlzaLlon ls free from laborŴsupply problems for aL leasL some sklllsŦ As
emphaslzedţ mosL organlzaLlons operaLe ln numerous labor markeLsŦ noL only does Lhe exLenL of Lhe markeL (localţ
reglonalţ naLlonalţ or lnLernaLlonal) vary for dlfferenL sklllsţ buL Lhe use of lnLernal labor markeLs varles among
organlzaLlonsŦ 1hose wlLh relaLlvely open lnLernal labor markeLs flll mosL [obs from ouLsldeŦ 1hose wlLh relaLlvely
closed lnLernal labor markeLs flll almosL all [obs from wlLhlnŦ
Cbvlouslyţ laborŴsupply conslderaLlons affecLlng wage levels vary wlLh labor markeLsŦ !obs fllled exLernally musL
meeL or exceed Lhe golng raLeŦ !obs fllled lnLernally are consLralned only by organlzaLlon declslonsŦ ln boLh
slLuaLlonsţ Lhe organlzaLlon ls able Lo vary lLs pay levels and hlrlng sLandards on Lhe basls of lLs wllllngness Lo payŦ

v% Sk||| and Lducat|on
8ecenL emphasls ln compensaLlon upon compeLency and sklll based pay makes sklll and educaLlon an lmporLanL
wage level deLermlnanLŦ AL Lhe level of Lhe economy Lhls focus has been playlng ouL for some Llme ln Lhe problem
of wage lnequallLy ln AfrlcaŦ 8eLween 1979 and 1993 Lhe raLlo beLween workers ln Lhe 90 percenLlle and Lhose ln
Lhe 10Lh percenLlle lncreased from 3Ŧ7 Lo 4Ŧ8Ŧ 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 10Ʒ Lo 13 ƷŦLhls lncrease for workers ln
Lhe 90Lh percenLlle conLlnued Lhrough Lhe 1990ƌsŦ 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 collegeŦ

1he resulL of Lhls Lrend ls creaLlng an hour glass shaped work force ln whlch Lhe mlddle class ls belng squeezed ouLţ
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 markeLŦ MovemenL up Lhe scale ls more and more on Lhe basls of educaLlonţ raLher
Lhan experlenceŦ 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 employeesŦ 1hls
slLuaLlon would call for Lwo clearly dlfferenL wage levelsţ one for Lhe Lop and one Lhe boLLomŦ 1hls seems Lo be
reflecLed ln Lhe move Lowards a ƍcoreƍ group of employees wlLh good wagesţ beneflLs and a degree of securlLy and
a ƍperlpheralƍ group of Lemporary and parL Llme employees wlLh low wagesţ llLLle ln Lhe way of beneflLs and no [ob
securlLyŦ

% L,9C¥LL ACCL91ANCL
1he conslderaLlons employers use ln deLermlnlng wage levels musL meeL Lhelr LesL of employeeţ or poLenLlalŴ
employeeţ accepLanceŦ lf employees are unwllllng Lo accepL Lhe wages offeredţ Lhe employmenL conLracL and Lhe
efforL bargaln are noL compleLedŦ 1hls sLaLemenL suggesLs LhaL all of Lhe facLors dlscussed ln Lhe above paragraphs
are poLenLlal wage level deLermlnanLsŦ lor exampleţ employee expecLaLlonsţ employee deflnlLlons of equlLyţ and
employee saLlsfacLlon or dlssaLlsfacLlon wlLh payţ become perLlnenL conslderaLlonsŦ So do Lhe demands of unlons
and socleLy (Lhrough laws and regulaLlons)Ŧ ldeallyţ Lhese conslderaLlons flnd Lhelr way lnLo employersƌ declslons
regardlng Lhelr ablllLy and wllllngness Lo payŦ

9LkILC1 A8Ck ,AkkL1
ÞerfecL compeLlLlon ln a resource markeL means LhaL Lhere are many small buyers of Lhe resourceţ and LhaL none
can lnfluence Lhe markeLŦ 1he supply curve ls ldenLlcal Lo Lhe marglnal resource cosL curve (M8C)ţ and ls horlzonLalŦ
1he wage ls glven dlrecLly by Lhe lnLersecLlon of Lhe supply llne and M8Þ curve (whlch ls Lhe demand for labor)Ŧ
1ake clerlcal workţ for lnsLanceŦ All buslnesses need someone Lo do Lyplngţ flllng and keeplng recordsŦ Many
poLenLlal employees are avallableŦ 1here ls no need for Lhe flrm Lo offer a hlgher wage Lhan Lhe currenLly prevalllng
wage for LhaL Lype of workţ nor should Lhe flrm offer lessţ because lf lL dldţ lL would flnd no one wllllng Lo workŦ
When we use Lhe model of demand and supply Lo analyze Lhe deLermlnaLlon of wages and employmenLţ we are
assumlng LhaL markeL forcesţ noL lndlvldualsţ deLermlne wages ln Lhe economyŦ 1he model says LhaL equlllbrlum
wages are deLermlned by Lhe lnLersecLlon of Lhe demand and supply curves for labor ln a parLlcular markeLŦ
Workers and flrms ln Lhe markeL are Lhus prlce LakersŤ Lhey Lake Lhe markeLŴdeLermlned wage as glven and respond
Lo lLŦ We areţ ln Lhls lnsLanceţ assumlng LhaL perfecL compeLlLlon prevalls ln Lhe labor markeLŦ !usL as Lhere are some
slLuaLlons ln Lhe analysls of markeLs for goods and servlces for whlch such an assumpLlon ls lnapproprlaLeţ so Lhere
are some cases ln whlch Lhe assumpLlon ls lnapproprlaLe for labor markeLsŦ


I,9LkILC1 A8Ck ,AkkL1
1he currenL sLage of developmenL assoclaLed wlLh a new look aL labor as one of Lhe key resourcesŦ uemand curve
uL wlll colnclde wlLh Lhe curve of Lhe marglnal producL ln moneLary LermsŦ 8uLţ as monopsonlsL pays equal pay for
each unlL of goodsţ Lhe supply curve of labor for lL ls a curve of average cosLs (SL ƹ AC)Ŧ 1he lnvolvemenL of each
addlLlonal worker means ralslng wages for all workersţ lncludlng Lhose for Lhe prevlously employedŦ
1herefore M8CL marglnal cosL curve lles above Lhe curve of average cosLsŦ When chooslng Lhe number of
employees monopsonlsL wlll be gulded by equallLy of Lhe marglnal producL and marglnal cosL (polnL L1)Ŧ AfLer
a verLlcal curve Lo Lhe SL and deslgnaLe a polnL Mţ we can deLermlne Lhe level of wages WMţ as well as Lhe amounL
of labor used by LMŦ
Whlle under perfecL compeLlLlon Lhe equlllbrlum wage raLe would be aL Lhe level of WLţ and Lhe equlllbrlum
number of workers would be equal Lo ƍLeŦ 1husţ ceLerls parlbus monopsonlsL maxlmlzes proflLs by hlrlng fewer
workers and Lhus pays a wage raLe lower Lhan ln a compeLlLlve envlronmenLŦ ln reallLyţ Lhe slLuaLlon of monopsony
can arlse ln Lhe labor markeL ln a small Lownţ where Lhere lsţ for exampleţ only one planLţ one hosplLalţ a schoolţ eLcŦ

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
employerŴmonopsonlsLŦ 1o analyze Lhls slLuaLlon graphlcallyţ lL ls necessary Lo comblne Lhe Lwo graphs Ŵ one LhaL
reflecLs Lhe acLlvlLles of monopsonyţ Lhe oLher Ŵ Lhe unlonŦ under perfecL compeLlLlon Lhe equlllbrlum wage raLe
would be esLabllshed aL Lhe level of Wţ whlle lL would be occupled by L manŦ Poweverţ Lhe flrm monopsonlsL wlll
always sLrlve Lo reduce wages Lo Lhe level of Wm by reduclng Lhe number of employed wlLh L up Lo LmŦ 1he unlonţ
ln Lurnţ wlll seek Lo ralse wages Lo Wuţ and reduclng Lhe supply of laborŦ 1husţ wlLh relaLlvely small dlfferences ln
Lhe number of employed workers deslred wage raLe ln Lhe unlon and monopsony wlll vary slgnlflcanLlyŦ WhaL wlll be
Lhe level of wagesţ clearly lmposslble Lo say Ŧ LveryLhlng depends on Lhe sLrengLh of opposlng monopollesţ lL ls also
posslble LhaL Lhe wage raLe close Lo lLs equlllbrlum levelŦ 1husţ bllaLeral monopoly can lead Lo resulLs LhaL are much
closer Lo a compeLlLlve markeL Lhan Lo markeL condlLlonsţ where Lhe monopoly of one parLy or anoLherŦ

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 usedŦ A
monopsony Lyplcally exlsLs when a flrm ls Lhe sole employer ln a reglon or a professlonŦ lor a monopsonyţ Lhe
marglnal resource cosL curve ls above Lhe supply curveŦ 1he opLlmum quanLlLy of labor ls deLermlned by Lhe
lnLersecLlon of M8C and M8ÞŦ 1he wage ls obLalned by exLendlng LhaL quanLlLy level down Lo Lhe supply curveŦ
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 LownŦ lor lnsLanceţ such reporLs appeared abouL Lhe Ceneral
LlecLrlcţ Pormel (a meaL packaglng planL) and WesLÞolnLŴÞepperel (LexLlle manufacLurer) ln Lhe unlLedŴSLaLesŦ ln
each of Lhese casesţ Lhe employer ls able Lo offer a lower wage because local resldenLs have llLLle cholce buL Lo work
for LhaL employerŦ

WAGL DIIILkLN1IAS
Wage dlfferenLlals occur ln all markeLsŦ ln some casesţ Lhese dlfferenLlals acL Lo aLLracL people Lo Lhe markeL who
would noL ordlnarlly conslder Lhose [obs and Lo reflecL Lhe rarlLy of skllls eLcŦ Powever Lhere are also oLher wage
dlfferenLlals whlch occur due Lo markeL lmperfecLlons and dlscrlmlnaLlon on Lhe parL of Lhe employerŦ
Labor markeL lmperfecLlons can occur on boLh Lhe supply and demand slde or ln some case boLh sldesŦ 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 markeLŦ Cn Lhe supply slde of Lhe labour markeL 1rade unlons cause lmperfecLlonsţ by uslng Lhe LhreaL
of sLrlkes and labour supply Lhey can force up wages Lo Lhe deLrlmenL of employmenL levelsŦ 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 sldesŦ 1here can be wage lmperfecLlons when lnformaLlon fallure
occursţ employees may be mlslnformed abouL Lhe avallablllLy of [obs aL dlfferenL wagesŦ As a resulLţ Llme wlll be
spenL looklng for work offerlng ºaccepLable" wage raLesŦ 1hls process wlll lncur cosLs lncludlng forgone wagesţ when
workers re[ecL lower pald [obs ln favour of looklng for a more accepLable wageţ Lheory Lells us LhaL Lhe accepLable
wage wlll decrease Lhe longer Lhe employee Lakes Lo geL Lhe [obŦ Wage dlfferenLlals ln a markeL economy are Lhere
Lo correcL and compensaLe for dlfferences ln labour markeLsŦ Powever Lhey are noL all perfecL and can be dlvlslve
and unproducLlveŦ ulfferences beLween wages are explalned byť
Ŵ dlfferenL levels of skllls and educaLlonţ
Ŵ nonŴmoneLary aspecLs such as rlsk and seasonallLyţ
Ŵ markeL lmperfecLlonsť lack of knowledgeţ lack of geographlcal and socloŴeconomlc moblllLyŦ
lL ls raLher obvlous LhaL a medlcal docLor would recelve a hlgh salary because of hls/her knowledge and sklllsŦ Plgh
salarles of workers ln consLrucLlon or on oll rlgs can be explalned by Lhe very real hazard Lhese occupaLlons presenL
for workersƌ safeLyŦ 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 labourŦ 1he acqulrlng of skllls ls called
human caplLal lnvesLmenL and ls seen as a longŴLerm assurance of hlgh quallLy on Lhe parL of employers and longŴ
Lerm hlgh wages on Lhe parL of employeesŦ Many professlonal occupaLlons requlre several years of fullŴLlme
educaLlon aL unlverslLy or college and oLhers requlre lnLermedlaLe quallflcaLlonsŦ 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 fallŦ 1he use of wage dlfferenLlals ln Lhls slLuaLlon ls Lo reward Lhe work
lnvolved ln Lhe aLLalnlng vocaLlonal quallflcaLlonsŤ howeverţ Lhls ls Lo Lhe deLrlmenL of unskllled workers whose [obs
become obsoleLeŦ
AnoLher wage dlfferenLlal occurs as a compensaLlng facLor Lo employees who have Lo endure less aLLracLlve work
condlLlonsŦ 1hls ls known as a compensaLlng wage dlfferenLlalŦ 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 labourŦ Alsoţ
occupaLlonsţ whlch demand unsoclable hoursţ wlll command a hlgher wages Lhan comparable [obsŦ Þay may noL be
Lhe only Lhlngţ whlch wlll be used by employers Lo compensaLe for poor worklng condlLlons leŦ A number of nonŴ
moneLary beneflLs such as longŴholldays wlLh payţ Lhe opporLunlLy Lo Lravel eLcŦ wlll all be used Lo lncrease markeL
supplyŦ 8eglonal varlaLlons can also explaln cerLaln wage dlfferenLlalsţ as wages are hlgh ln cerLaln areas Lhen
labour wlll be drawn Lhereţ howeverţ flrms wlll Lry and do Lhe opposlLeŦ 1hrough Lhe push and pull of cerLaln facLorsţ
ln Lhe long runţ Lhe markeL should correcL any reglonal dlfferenLlals especlally ln key work areasŦ ulscrlmlnaLlon can
also accounL for cerLaln wage dlfferenLlalsŦ 8aclal and gender dlscrlmlnaLlon can accounL for a large amounL of Lhe
dlfferenLlal ln wages beLween whlLe males and Lhe resL of Lhe worklng populaLlonŦ Lmployers wlll pay women and
eLhnlc mlnorlLles less due Lo lllŴlnformed vlews abouL Lhe lnLelllgenceţ loyalLy and producLlveness of female and
nonŴwhlLe workersŦ 1he governmenL has Laken some acLlon Lo counLeracL Lhese unwanLed and unproducLlve wage
dlfferenLlals wlLh Lhe lnLroducLlon of Lhe Lqual Þay AcLţ Lhe Sex ulscrlmlnaLlon AcL and Lhe 8ace 8elaLlon AcLŦ


     #

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