Looking to Benchmark Pay?
Labor-Supply Considerations
Salary level decisions based on labor-supply considerations must be made in light of the prospects of the organization and the industry.
| Firms in declining industries | Expanding organizations |
|---|---|
| Firms in declining industries may be forced to allow salary levels to drop with reduced productivity and to plan on less efficient and lower-paid workforces. | An expanding organization may want to upgrade the quality of its workforce by paying above the market and raising standards of employability. |
The extent to which labor-supply considerations affect salary levels apparently varies greatly among organizations.
- Organizations in high salary industries in low salary areas experience few labor supply problems.
- Organizations in low salary industries in high salary areas may face serious labor supply problems.
Although most organizations fill as many jobs as possible from within, most face labor-supply problems for at least some skills.
Therefore, they must contend with the following factors:
- organizations operate in numerous labor markets
- employee acceptance is conditional
Not only does the extent of the market (local, regional, national or international) vary for different skills, the use of internal labor markets varies among organizations:
| Open internal labor markets | Closed internal labor markets |
|---|---|
| Those with relatively open internal labor markets fill most jobs from outside. | Those with relatively closed internal labor markets fill almost all jobs from within. |
Obviously, labor-supply considerations affecting salary levels vary with labor markets:
- Jobs filled externally must meet or exceed the going rate.
- Jobs filled internally are constrained only by organization decisions.
In both situations, the organization is able to vary its pay levels and hiring standards on the basis of its willingness to pay.
Employee acceptance
The considerations employers use in determining salary levels obviously meet their test in employee or potential-employee acceptance. If employees are unwilling to accept the salaries offered, the employment contract and the effort bargain are not completed.
This statement suggests that all of the following factors become pertinent considerations:
- employee expectations
- employee definitions of equity
- employee satisfaction or dissatisfaction with pay
- the demands of unions and society (through laws and regulations)
Ideally, these considerations find their way into employers' decisions regarding their ability and willingness to pay.
| Reservation wage |
People make decisions, not by evaluating all alternatives but by developing a model in their head of an acceptable solution. Doing this creates a situation in which economists state that wages are "noncompensatory." This means that there is some wage below which job seekers will not accept a particular job offer. Other factors will not substitute for this "reservation wage." This wage may or may not be related to the going wage. |
|---|
Market power is also a potent factor in employee acceptance.
Since the 1980s, there have been periods when salary increases failed to keep up with changes in the cost of living and workers fell behind economically. Additionally, work pressures increased and long work hours became standard. This was accepted by workers because during these periods the unemployment rate was relatively high, and organizations periodically engaged in mass layoffs.
Memory Jogger
Jobs filled internally: