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The Labor Market and Pay Rates
By looking at each of the conditions that create a labor market, we can understand the factors that determine actual pay rates.
Each labor market has different characteristics.
For example…
Labor markets vary greatly in the degree to which they have barriers to entry. Some require few or general skills and thus have a low barrier to entry, such as the labor market for clerks since many in the labor market have the skills to perform a clerical job. Others require higher skills and training and so have a higher barrier to entry such as the labor market for AI programmers.
An employee's skill type and skill level determine the labor market(s) for which they qualify and how well they can perform the job. Differences in education, experience, ability, and motivation will influence the person's performance on the job.
Organizations compete in the labor market with unique strategic employment value positions that drive total rewards and related compensation programs. Some companies may choose to pay all or some of their employees above the market rate in the belief that this will attract top talent and engender greater productivity and loyalty. Economists call this the theory of efficiency wages.
| Theory of Efficiency Wages | The idea that it may be beneficial to pay workers more than the equilibrium wage in some circumstances. |
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Pay and employment decisions in labor markets are impacted by:
- the variety of jobs and employees
- location
- salary survey information
- maximization
- unions
- government regulations
- internal labor markets
- industry
- technology
- education levels
Variety of Jobs and Employees
All jobs and all employees are not the same.
- Jobs: vary in the type and degree of skill required to perform them.
- Employees: vary in skills and the degree to which they can or desire to apply them.
Location
Labor markets are segmented by location resulting in variations called geographic differentials. Organizations consider proximity to suppliers, customers, and a workforce when selecting a business location for their operations. When labor costs are not the primary driver of business decisions, moving to a new location may increase the demand for employees in the area without a corresponding increase in supply. As a result, the organization may have to offer higher pay to attract needed employees. Jobs in downtown locations offer higher compensation than the same jobs located in suburban settings (where employees usually live).
Let's take a look at a typical employee's situation…
Greta is making $15/hour in Jefferson City, Missouri. She's considering a move to Seattle, Washington. Greta knows she'll make over $20/hour in Seattle. But moving to an area with higher pay is only worthwhile if the cost of living is approximately equivalent. Seattle's cost of living is higher than Jefferson City's cost of living. Earning less in a location with a low cost of living may be more economically efficient than living where the pay is higher, but the cost of living is considerably higher. Greta decides to stay in Missouri.
Cost of labor and cost of living do not move in the same direction. Labor costs are determined by the supply and demand of labor. Cost of living is based on the supply and demand of goods and services for the specific location.
Memory Jogger
The variety of jobs creates different: