Looking to Benchmark Pay?
SUMMARY
Fundamentally, a labor market exists based on employer demand for workers and their skill set and the number, or supply, of workers who are available to fill that demand. Pay levels are determined where demand and supply come together, represented graphically by the intersection of the demand and supply curves, known as the equilibrium point. Changes in labor supply and demand move the equilibrium point and the pay rate.
Aside from the demand and supply of labor, there are other factors that impact pay at a national, regional, or local level creating many labor markets. Pay and employment decisions are impacted by:
- the variety of jobs and employees
- location
- salary survey information
- maximization
- unions
- government regulations
- internal labor markets
- industry
- technology
- education and training
Employers and employees are always trying to gain the most from each other at the least cost. This is known as maximization. In a tight labor market, employers may have to offer higher wages to get the employees they need. However, when demand for labor declines, organizations usually resort to layoffs rather than lowering wages.
The labor market is not perfect. There are many reasons why workers do not always seek out the highest wages including that they may not want to move, they may not want a longer commute, and they may not want to lose benefits they have with their current employer.
Unions and government regulations also distort prices in the labor market. The FLSA and other minimum wage laws set a wage floor. Other laws may create labor costs in addition to wages. Union collective bargaining agreements can set wages in a specific industry, geographical area, or at an individual company. They may also restrict the supply of labor or increase demand beyond what the market requires.
An organization may set its pay rates using an internal equity approach. It may decide to pay certain jobs above the market price and others below the market price depending on how the jobs are valued internally.
Different industries and the technology they use can impact pay. For example, an industry may become highly automated requiring workers with a new set of skills but many fewer workers with skills that were previously in demand. This creates an excess supply of workers who are no longer in demand, which creates a drag on their wages.
Offshoring will continue to depress wages for some jobs. However, with companies seeking to build more robust supply chains, there is evidence that manufacturing in the U.S. is getting a boost. These new facilities are highly automated and require skilled workers.
Education and training is crucial to matching the skills of the labor force to the needs of companies. The popularity of four-year degrees is in decline, especially among males, many of whom are opting to prepare for a career through apprenticeships, vocational training, certifications, and on-the-job training. Where organizations face a shortage of skilled workers, they need to be more proactive about providing training, either on-the-job or through pay incentives to encourage their employees to upskill.
For workers with higher level skills that are in demand, real wage growth has been positive and that will continue for the foreseeable future as there continues to be a dermand for these workers. Unless productivity improves at the middle and lower wage distributions, though, there will likely be continued wage stagnation that barely keeps up with inflation despite a post pandemic surge, especially at the lower wage distribution.