Question

how do wages compensate for differences in job characteristics?

why do wages rise above the level that balances supply and demand?

Answer 1

(A) A wage is defined as a monetary compensation (or remuneration, personnel expenses, labour) paid by an employer to an employee in exchange for work done. Wages are part of the expenses that are involved in running a business.

Wage differential is a term used in labour economics to analyse the relation between the wage rate and the unpleasantness, risk, or other undesirable attributes of a particular job. A compensating differential, which is also called a compensating wage differential or which is defined as the additional amount of income that a given worker must be offered in order to motivate them to accept a given undesirable job, relative to other jobs that worker could perform. One can also speak of the compensating differential for an especially desirable job, or one that provides special benefits, but in this case the differential would be negative: that is, a given worker would be willing to accept a lower wage for an especially desirable job, relative to other jobs.

The idea of compensating differentials has been used to analyse issues such as the risk of future unemployment, the risk of injury, the risk of unsafe intercourse and the monetary value workers place on their own lives, and in explaining geographical wage differentials.

The theory of compensating wage differentials provides a theoretical framework to explain why the ‘underlying’ structure of pay differs between geographical areas, Competition in labour markets ensures that the net advantages of different jobs will tend to equality. Thus, higher pay in some areas of the country is expected where the cost-of-living is higher while higher pay is also necessary to compensate for a less pleasant working environment. The rate of pay in the private sector represents (according to the hypothesis) the exact rate necessary to attract and retain staff. Thus all else equal a higher rate of pay in one area means that this area is less attractive (either has low amenity levels or higher cost-of-living). The pay offered in this area is set to counter the relative unattractiveness of the region. Some empirical studies have tried to test this assumption. Most of this research is interested in inter geographical wage disparities.

(B) The three reasons that a worker's wages might be above the level that balances supply and demand:

a) Minimum wage laws
b) Market power of labour unions
c) Theory of efficiency wages

Minimum wage law:

Minimum wage law is the body of law which prohibits employers from hiring employees or workers for less than a given hourly, daily or monthly minimum wage. More than 90% of all countries have some kind of minimum wage legislation.

Advantages of Minimum wage law:

* Worker Protection

The federal minimum wage was constituted in 1938, during the Great Depression. Reasons for setting a wage minimum included stabilizing the economy and ensuring that all workers, including those who were not labour union members, were at least able to afford their basic living needs.

* Workforce Motivation

When employees are paid well, they enjoy better mental and physical health. When employees are healthy, their quality of When employees are paid well, they enjoy better mental and physical health. When employees are healthy, their performance improves, they are happier and are motivated to improve their skills. Business owners benefit from having happy, motivated workers on their team. This is why many companies, even in industries in which low wages have historically been the norm, will voluntarily pay more than minimum wage to their employees.

* Market power of labour unions:

A labour union is a group of workers that negotiates with employers over wages and working conditions. A labour union seeks to change the balance of power between employers and workers by requiring employers to deal with workers collectively, rather than as individuals. As such, a labour union operates like a monopoly in a labour market. We sometimes call negotiations between unions and firms collective bargaining.Unions have a substantial impact on the compensation and work lives of both unionized and non-unionized workers

Advantages of Market power of labour unions:

* Unions increase wages of unionized workers by roughly 20% and increase compensation, including both wages and benefits, by about 28%.

* Unions reduce wage inequality because they increase wages more for low- and middle-wage workers than for higher-wage workers, more for blue-collar than for white-collar workers, and more for workers who do not have a college degree.

* Strong unions set a pay standard that non-union employers follow. For example, a high school graduate whose workplace is not unionized but whose industry is 25% unionized is paid 5% more than similar workers in less unionized industries.

* The impact of unions on total non-union wages is almost as large as the impact on total union wages.

* Theory of efficiency wages:

The idea of the efficiency wage theory is that increasing wages can lead to increased labour productivity because workers feel more motivated to work with higher pay.

Therefore if firms increase wages – some or all of the higher wage costs will be recouped through increased staff retention and higher labour productivity.

Summary:

Wage differential is a term used in labour economics to analyse the relation between the wage rate and the unpleasantness, risk, or other undesirable attributes of a particular job and the three reasons that a worker's wages rise above the level that balances supply and demand are the below:

a) Minimum wage laws
b) Market power of labour unions
c) Theory of efficiency wages.