The labour market influence in the determination of pay

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In labour economics, the techniques used to manage pay is of great significance in the conduct of workplace affairs. The payment of labour is fundamental in moulding the relationship between employers and employee (Lipsey & Chrystal, 2007, p. 217).

Indeed, it is the most visible focal point of all concerns related to labour. It is against this back drop that employers have devised various value propositions in fixing pay for their employees. The pay-fixing strategies have undergone notable transformations in the latter years (Lipsey & Chrystal, 2007, p. 576).

Needless to say, this has fairly weakened the influence of labour unions bearing in mind that competitive pressures have become intense and globalised.

Nonetheless, it is imperative to mention that the cost of labour is pay and consequently it would cover wider terrains of market force that than the influence brought about by a unit employer (Lipsey & Chrystal, 2007, p. 9). To be precise, pay can be described as the primary compensation for labour done within a given period of time.

From the background of conventional economic theory, there is a conspicuous denial that employers do not have any defined role in setting up pay standards.

However, it is commonplace for similar firms operating within the same geographical environment and market conditions to offer varying wages to their employees, which can only be explained by the fact there are other factors that determine pay other than the internal mechanics of a firm (Baumol & Blinder, 2007, p.165).

This paper explores the extent at which the labour market determines pay with cross reference to organisational behaviour patterns within a firm as well as the impact of state regulation on wage standards.

Labour remains as one of the most fundamental factors of production (Lipsey & Chrystal, 2007, p.208). In labour economics, it is perceived to be a derived demand in the sense that it is critically required in the process of production, not just an intermediary component.

In any case, revenue generation and profitability of a business organisation is largely dependent on labour input. Moreover, the Marginal Revenue Product will quite often determine the need for surplus labour whenever required by a firm (Lipsey & Chrystal, 2007, p. 638).

In addition, the marginal cost of an employee is yet another determinant whether additional labour will be required by a firm or not (White, 2002). For example, a firm can only retain a certain number of workers above which it will cease to be profitable.

In order to obtain the right computation of the Marginal Revenue Product, the product between the cost price of the either good or service at the end of production and the Marginal Physical product of the employee is calculated (Baumol & Blinder, 2007, p.165).

If the firms Marginal Cost is less than the Marginal Revenue Product, then the business enterprise will be at liberty to hire an additional worker since it will boost profitability. Nevertheless, hiring of additional labour force can be effected by the firm up to a mark when the two margins are congruent to each other (Baumol & Blinder, 2007, p.167).

Hence, according to economic theory, the labour market will be considered saturated when the hiring firms have attained the mark whereby the Marginal Revenue product is equal to the Marginal Cost (Baumol & Blinder, 2007, p.169).

It is sometimes pragmatically cumbersome to equalize pay among employees in a given firm. This has been found to be notably common in labour markets that are partly or fully resilient or mixed altogether (Kessler & Purcel, 1992, pp.23-24).

For instance, if a doctor and a security officer are hired by the National Health Service, their pay will definitely differ by a great deal although working in the same firm (Kessler & Purcel, 1992, pp.18-21). There are myriad of factors that can be used to explain this phenomenon.

A security officer has a far lower Marginal Revenue Product than a doctor. Moreover, becoming a security officer has less barriers compared to the process of becoming a doctor. The training of a doctor is not only time and resource consuming; it also demands the right intellectual capability and tolerance for an individual to succeed in that profession (Crail, 2006).

It is the interdependence of the three forms of capital that the pay as well as Marginal Revenue Product will be affected within and between different geographical locations.

Likewise, the movement of any of the three types of capital among different countries will result into capital mobility which refers to the ease with which money can flow in and out of an economy or across various national borders. (Elmore, 2003).

At this juncture, it is vital to explore the two major pathways through which the labour markets can determine pay. Both the microeconomic and macroeconomic elements of a labour market can determine how much employees are paid on labour offered.

Both the individual employees and the specific firms themselves are believed to play their unique roles in shaping pay standards in the labour market (Ironside & Seifert, 1995, pp. 38-44). The application of microeconomics in a labour market can be used to explain this relationship (Brown, 2009).

A government can play momentous role in regulating the pay rate to workers at different levels. In order to achieve this type of regulation, a state can set up base lines for two types of pay namely the minimum and the living wage (Dennis, 2005, p.35).

In either case, periodic time standards within which certain pay rates should be implemented to workers are stipulate by a government. In United Kingdom, for instance, a National Minimum Wage Act was enforced way back in 1998 (Anker, 2006). Many other countries especially in the developed world have already adopted minimum wage standards for workers (Steifert, 1992).

In some cases, a living wage has been embraced by some firms (Dennis, 2005, pp.29-33). There is need to distinguish between minimum wage and living wage as applied in various work environments.

In most accepted and well documented statutory definitions, the term minimum wage is mainly applicable to labourers who are either skilled or semi-skilled. Different countries across the world have distinct minimum wage stipulations based on the economic performance as well as the cost and standards of living (Locke, Amengual & Mangla, 2009).

First, a living wage is primarily a basic pay awarded to workers so that they can be able to adequately meet their daily needs (Brown, 2009, pp.102-106). A living wage ensures that an individual is in a position to provide for basic needs and wants that are acceptable to the normal standard of living.

For instance, a living age should be able to cater for food, education, healthcare as well as other expenses such as the cost of commuting. Most governments would demand companies and organisations to pay workers some minimum wage so that they can be in a position to foot various expenses even as they deliver their services on a day-to-day basis (Welfare, 2006).

On the other hand, a minimum wage refers to a fixed pay stipulated by a government or other employee welfare agencies that employers are supposed to pay their workers. The authority charged with the duty of fixing a minimum wage must be legally instituted so that it can enforce its mandate through a legal pursuit especially in cases where employers flout regulations.

This least amount of wage that may be awarded to workers can also be put in place by a formal agreement between the employer and other interested parties such as workers themselves or labour unions (Anker, 2006, p. 324). In addition, a minimum wage can affect either the whole state or a specific group of workers.

Although most legal provisions on minimum wage are often binding to employee groups, there are certain occupations which may not be required to abide by these regulations.

For example, employees in the service and agricultural sector in United States are exempted from the minimum wage conditions. Further, minimum wage varies from country to country (Anker, 2006, pp.316-319).

On the same note, a commensurate wage may be paid to employees who have special physical or mental needs. This may still be classified as minimum wage payable to people with disabilities. It is imperative to note that each worker has a unique ability and performance at work regardless of the disability.

Hence, the commensurate wage which acts as the minimum wage for the disabled may not be uniform across the board. Moreover, this wage is also dependent on the geographical setting and the status of the economy from which the workforce is derived (Lipsey & Chrystal, 2007).

The legal framework governing the living wage principally differs from those regulating minimum wage. One outstanding feature of a living wage is that in most cases, the coverage of its legality may affect only a small fraction of the workforce contrary to the minimum wage whose provisions affect a larger population.

The living wage laws mostly affect specific group of workers in given organizations so that they can afford both basic and secondary needs (Ironside & Seifert, 1995). In addition, a living wage is often used in some countries to calculate poverty index while the minimum wage cannot be used for such purposes.

Hence, it goes without saying that the two types of wages are related but completely different from each other. In order to further create a vivid distinction between minimum wage and living wage, it is pertinent to investigate the effects brought about by both types of wages (Industrial Relations Services, 2002).

In real practice, low income workers can practically benefit when the living wage is implemented at their place of work. In line with this, the urban poverty index can be lowered substantially whenever this ordinance is implemented, bearing in mind that it caters for a larger population of workers than the minimum wage (Koshiro, 1992).

Although the typical low income earners are the beneficiaries of this type of wage, it may lead to lack of efficiency in companies during periods of recession In addition; firms which are still at their infancy stage may be unfavoured economically by the seemingly high spending on wages contrary to the revenue generated (Procter et al., 1993).

Worse still, when minimum wage is followed to the letter, it has the potential to trigger inflation, which may usher in tough times for workers since their pay may be maintained to the minimal due to hard economic times (Adam, 2005, p.31).

Therefore, as much as a government may determine workers pay through legal provisions as mentioned above, it may be not be a very strong and independent variable in wage setting compared the labour markets (Income data services, 2001).

Notwithstanding state regulation on pay rates for employees, collective bargaining and agreements between workers and labour unions can curtail pay within the comfort of both the firm and workers.

A firm is primarily defined as a business enterprise formulated to specifically supply goods and/or services to end users. It may be publicly or privately owned and its main purpose is revenue generation. There are myriad of labour theories that are integral to firms.

For example, the concept that pay rates will differ across firms is expounded in classical view theory (Dennis, 2005). It elaborates that marginal productivity and pay rates will reflect each other since different firms have access to various amenities that results into variation in the amount paid to workers.

According to the efficiency wage view, workers who are not duly supervised at workplace are more likely to be offered higher pay than those who are continually monitored. Moreover, pay variations across different firms is also occasioned by inequality in unionization rates according to the labour market theory.

Modern policy debate on role of a firm in setting pay standards is largely dominated by the neo-classical theory of the firm. Wage equalization is a possible occurrence in any firm when this theory is applied in labour market. However, the theory can only work in an ideal market situation where several factors have been held constant.

For instance, the theory requires a free or liberalized market (Egan, 2004). There should be no state regulation whatsoever. Market response by consumers should be self-driven and void of any statutory interference.

The 1916-1918 Whitley Committee proposed quite a number of recommendations that would seek to not only recognize labour unions but also strengthen their roles as part of building viable industrial relations. The principles adopted thereafter came to be known as Whitleyism (Steifert, 1992, pp.212-216).

The fundamentals of extensive industrial bargaining were thereafter adopted. Since then, collective bargaining on workers pay has been done through trade unions. Indeed, Whitleyism has been very instrumental in setting up pay standards in various industries.

The Annual Survey of Hours and Earnings (ASHE) is an important parameter that can be used in the determination of pay standards (Brown, 2009, p.12). This survey provides data on earnings make up as well as the hourly distribution relative to the pay levels of workers spread across various regions and job categories. Hence, the government can make use of ASHE in setting up the minimum wage in various industries.

Events within a firm can, in practice, lead to marked differences in wages. One cause for such differences is the organizational behavior of policy and decision makers running a firm. On the same note, a firm can adjust its worker wages due to market failures occasioned by external factors such as inflation and decline in demand.

On the other hand, a worker may stand out in the labour market irrespective of the internal actions of decision makers within a firm (ACAS, 2011). Through human capital theory, an employee who has advanced education and training will likely receive higher wages than the colleagues who are not.

Besides, an employee with a unique talent will be part of a non-competing group since it is impossible to train individuals to acquire the very talent. As a result, the employee will most likely stand a higher chance of receiving higher pay than others.

When employees tend to defend the territory of their jobs, it is referred to as balkanization. They can achieve this by acquiring higher qualifications or using gender, legal, race or cultural barriers. Over and above the aforementioned pay determinants in a firm, differences in wages may also result from working skills and experience gained by an employee.

Workers with higher skills and better working experience are competitive in the labour market. Moreover, the nature of the responsibility or job description assigned to an employee by a firm will determine the pay rate. Lighter and more direct responsibilities will more likely attract meager pay from the labour market (Kessler & Purcel, 1992).

Furthermore, the effort needed to discharge a given responsibility is yet another consideration when setting wage standards within a firm. The aggregate pay will also be affected by the rate of unemployment. Realistically, the initial phase of most wage setting is bargaining.

Thos may take place between the employer and employee or between a labour union and employer. In whichever case, the bargaining power of workers is adversely affected and further weakened by higher unemployment index. Workers are compelled to accept lower pay since the labour market is saturated with job seekers.

As a consequence, firms will pay remunerate their workers poorly by taking advantage of the situation (Adam, 2005, pp.32-33). Worse still, the contracted workers will be willing and ready to work in spite of the lower pay since they do not have any alternative.

According to ACAS definition, job evaluation refers to how much a particular job is worth within workplace (Egan, 2004, pp.9-10). It is a consistent approach whereby a ranking process is used to categorise various jobs based on the relative demand placed on a particular job by an employee.

Hence, job evaluation assists in setting up a benchmark for a grading structure that is not only orderly but also fair enough. Moreover, the job evaluation procedure permits the selection of benchmarks whereby individual jobs are ranked in terms of their relative value.

In order to carry out an effective job evaluation, a factor plan is necessary. These are components that are necessary when evaluating jobs. When job evaluation is implemented to the letter, it is possible to set up benchmarks that can be used to determine pay (Egan, 2004, pp.12-13).

For instance, the relative value attached to a given job can be used to set up pay standards since it is both a system and structure used to determine pay.

In summing up, it is imperative to reiterate that the extent to which labour market determines pay can only be evaluated when other market forces such as state regulation and internal firm mechanics are analysed. The labour market is in itself a derived demand since the process of production cannot take off without its inclusion. Besides, profitability of a firm is a direct function of labour.

Hence, whenever a firm requires additional labour, the Marginal Revenue Product and the Marginal Cost ought to be compared. When the two components are balanced, then a firm can no longer hire additional employees. These are strong labour market imperatives that can explain why the labour market is a major pay determinant.

On the other hand, a government can set up the minimum wage for workers within different categories. Hiring firms are then supposed to comply with the pay standards according to the set laws. A case example is the United Kingdom which enacted the National Minimum Wage for its citizens. In some cases, governments and individual firms may set a living wage for a certain segment of workers.

Finally, determination of pay can be effected by a firm. For example, the decision making organ of a firm may opt to set pay standard that is consistent with the goals and objectives of the firm. Besides, the level of experience, skills and competences can elevate the wage level of a worker.

Moreover, the application of the human capital theory whereby a worker has undergone further education and training may also determine the pay standard for that employee. Meanwhile, out of the three elements, the labour market remains to be the one single most determining factor when setting up wage standards.

References

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The labour market influence in the determination of pay

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