PROCESS OF DETERMINATION OF WAGES

Determination of equitable wage and salary structure is one of the most important phases
of employer-employee relations. The primary objective of wage administration
programme is that each employee should be equitably compensated for the service
rendered on the basis of:
(i) the nature of job,
(ii) the present worth of that type of job in other organizations, and
(iii) the effectiveness with which the individual performs the job.

The first two factors are related to job evaluation and wage survey, while the third to
performance appraisal. Generally, wage payments in the organization are determined by
the following sequence of events:

Job Analysis Minimum Wage

Law

Job Description Administration

and Job Job Wage Wage
Evaluation of Wage
Specifications Survey Structure
Structure

Performance Norms Performance

Standards Appraisal

Wage Payment

Comparison of a job to other jobs in the organization is done through job evaluation.

Comparison of similar job in other organizations is done through wage survey to

determine the going wage for the given job.
 WAGE SURVEY
After the relative worth of jobs in the organization has been determined by job
evaluation, the actual wages to be paid to employees must be determined taking into
consideration wages of similar job in other organizations.

A major factor in taking such decisions is the survey of wages of similar jobs in other
enterprises in the same region and in the same industry.

The purpose of job survey is to determine the extent to which the organization’s pay
scales are like those of other enterprises in the region. So, they must be taken into
consideration while fixing the wages for different jobs in an organization. The wages
and salary practices of other organizations have an important impact on the
employment, retention and morale of the personnel.

If external alignment is lacking, the organization will not be able to retain or attract
capable employees from outside.

Normally employers choose the average wage level so that employees do not lave,
even it must be above the average level.

WAGE DETERMINATION IN COMPETITIVE MARKETS

Explanations for wage differentials in the labour market

There is a very wide gulf in pay and earnings rates between different occupations in the
UK labour market. No one factor explains the gulf in pay that exists and persists between
occupations and within each sector of the economy. Some of the relevant factors are
listed below

1. Compensating wage differentials - higher pay can often be some reward for
risk-taking in certain jobs, working in poor conditions and having to work
unsocial hours
2. Equalising difference and human capital - wage differentials compensate
workers for (opportunity and direct) costs of human capital acquisition. There is
an opportunity cost in acquiring qualifications - measured by the current earnings
foregone by staying in full or part-time education.
3. Different skill levels - the gap between poorly skilled and highly skilled workers
gets wider each year. One reason is that the demand for skilled labour grows more
quickly than the demand for semi-skilled workers. This pushes up average pay
levels.
4. Differences in labour productivity and revenue creation - workers whose
efficiency is highest and ability to generate revenue for a firm should be rewarded
with higher pay. Top sports stars can command top wages because of their
potential to generate extra revenue from ticket sales and merchandising
 5. Trade unions - unions might exercise their collective bargaining power to
achieve a mark-up on wages compared to those of to non-union members
6. Employer discrimination is a factor that cannot be ignored

Wage Determination in Perfectly Competitive Labour

Markets
How wages are determined in a perfectly competitive labour market. A perfectly
competitive labour market will have the following features

• Many firms
• Perfect information about wages and job conditions
• Firms are offering identical jobs
• Many workers with same skills

Diagram of Wage Determination

• The equilibrium wage rate in the industry is set by the meeting point of the
industry supply and industry demand curves.
• In a competitive market firms are wage takers because if they set lower wages
workers would not accept the wage.
• Therefore they have to set the equilibrium wage We.
• Because firms are wages takers the supply curve of labour is perfectly elastic
therefore AC = MC
• The firm will maximise profits by employing at Q1 where MRP of Labour = MC
of Labour

Comparing Wage of Lawyers and McDonalds workers

• Lawyers get higher pay for 2 reasons

1. Supply is inelastic because of the qualifications required

2. MRP of lawyers is high. If they are successful they can make firms a lot of
revenue.

McDonalds workers however get lower pay because:

1. Supply is elastic, because there are many 1000s of people who are suitable for
working, qualifications are not really required

The MRP of a McDonalds worker is much lower because there is a limited profit to be
made from selling Big Macs.