Environments of Compensation and Benefits Administration

Compensation Labor Markets

Have you ever stopped to consider what is meant by "market"?

• "We're in the market for…" describes a need or demand by an employer for a person with a specific skill set.
• "The market is saturated…" describes a level of supply, in this case, an overabundance of people with a specific set of skills.

Supply and demand for labor make up what is called a "labor market." A labor market can, to a great extent, dictate pay rates for particular jobs. Labor markets are the virtual economic meeting place of employers, current employees, and prospective employees. Markets are major contributors to the economic environment that impacts compensation.

External labor markets

The external labor market is not specific to one organization and may be comprised of one neighborhood or the whole world. The size of the labor market will vary depending on the type of position that is under consideration:

• Managers and professionals may have a regional, national or, on occasion, international market.
• Most administrative and operative jobs are supplied by local labor markets (often defined by commuting distance).

Any given geographic area contains many specialized markets for various occupations and skills.

Internal labor markets

An internal labor market, comprised of a single organization, can be considered a separate labor market for two reasons:

1. An organization typically promotes from within, rather than filling positions from the outside labor market.
2. An organization may create jobs that are specific to that company. In other words, the organization may train an individual so that the skills they obtain are not "marketable" or in demand in an external labor market.

Labor Market Characteristics

Labor markets do some things well. They are:

• Reasonably effective in determining relative pay rates for different jobs.
• Good at raising pay levels and living standards with increases in productivity and national output.
• Able to sort millions of workers with varying skills and interests into thousands of different jobs and employers.

Labor markets do a poor job of:

• Regulating working conditions and human resource policies. Although a worker could always quit if the working conditions are bad, they really can't gauge the working conditions properly until they are in the job.

The shortcomings of labor markets are the major reason why for the employer, union, and government there are rules that supplement the operation of market forces.