Organization Salary Determinations

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Course Contents

  1. Introduction
    page 1
  2. Economic Forces
    page 2
  3. Productivity
    page 8
  4. Employer Willingness to Pay
    page 13
  5. Labor Supplies
    page 19
  6. Summary
    page 21
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Productivity Arguments

Many countries, the United States included, have at times used wage-price guidelines in attempts to control pay and improve productivity.

Australia has tried to make productivity a major component of the collective bargaining process but has made little headway because the unions do not find the approach to be platable.

This formulaic approach to using productivity has advocates and opponents. Here's what they say.

Advocates say: Opponents say:
  • Increasing pay levels in specific organizations in accordance with annual increases in productivity in the economy ensures that productivity gains get distributed.
  • Distributing these gains through price reductions may contribute to deflation and economic instability.
  • Although there is a long-term relationship between productivity and pay, the short-term relationship is highly variable, which suggests that other pay-determining forces are more pertinent.
  • Tying pay to productivity distorts the structure of relative salaries. Thus salaries would fail to allocate labor to areas of high demand and away from areas of low demand.
  • When the cost of living is increasing, limiting salary increases to productivity increases would be unpalatable to employees. Even more unacceptable would be salary cuts when economy-wide productivity declines, as it has at times.

In Australia, the most successful cases of the use of pay tied to productivity have occurred where changes in work processes and rules have accompanied the connection of productivity and pay. These work changes have made the improved productivity a direct result of worker activity. Where the reason for the productivity increase is solely technology, the results are not as good.

Faulty indexes

The inflationary potential of formulaic approaches is enhanced by a tendency to seek a productivity measure that makes larger pay increases feasible. For example, increases in industry productivity may be higher, but industry indexes are less reliable and more variable.

Such indexes may also conceal the contribution of one industry to another's productivity. Even indexes of national productivity may overstate non-inflationary salary-increase possibilities by failing to measure:

  • the effects of worker transfers from lower to higher productivity industries.
  • other sources of increase in labor quality.

Memory Jogger

Economy-wide advances in productivity can be used to set pay. Opponents to this practice say that:

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