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"Ethical Ways in Wage Determination"

Determinants of the Wage Structure

Wage Structure Concepts
Influences on the Wage Structure
The Just Wage Issue in the Literature of the Church
Determinants of the Wage Structure
Economic Theory of Wage Rates
Evidence About Wage Rate Differences andthe Consequences of Minimum-Wage Ratesfor Unskilled Workers
The Issue of a Just Wage in Relationship to Developing Countries
Reflections on Recent Papal Documents
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Numerous forces operate as wage determinants. These might be roughly classified as economic, institutional, behavioral, and equity considerations. Because wage decisions appear to be made by comparison to labor markets, many of the determinants appear to be economic. But because the meaning and force of economic variables are interpreted by organization decision makers, these determinants are tempered by institutional, behavioral, and ethical variables.

There is no doubt that wage determinants operate through labor markets and that they include economic forces. More profitable organizations tend to pay higher wages for the same occupations than less profitable organizations. Capital-intensive organizations tend to be more profitable because additional capital usually increases productivity. Small organizations tend to pay lower wages often because those wages are all they can afford. Service industries that tend to be labor-intensive, low-profit, and low-wage are often composed of small organizations.

Local labor markets vary in wage levels, depending on industrial composition. Communities in which a large proportion of organizations are in high-profit industries tend to be high-wage communities. Communities with a high proportion of organizations in low-profit industries tend to be low-wage. Sometimes communities experience short-run increases in wage levels because labor demand increases compared to labor supply; or there is a decrease in wage levels because of an increase in labor supply without a proportional increase in demand.

Differentials among local labor markets are limited by a tendency for workers to leave low-wage communities and for organizations to locate new plants in low-wage areas. Unions sometimes attempt to eliminate these differentials by making a concession in work rules affecting productivity. The cost of living tends to be higher, in high-wage areas.

Wage levels tend to increase faster in good times, both because profits increase and because workers tend to become more demanding and more mobile. Unions reinforce this tendency by insisting on using gains made elsewhere to make their comparisons. But even in good times less efficient organizations survive by paying less and lowering standards of employability.

Even though good times, high profits, and increasing productivity tend to increase an organization's wage-paying ability, organizations may or may not be willing to pay higher wages. Some of them do so to simplify recruiting problems and to forestall turnover. Others do so because above-average profits whet the appetites of workers and their unions. Most organizations tend to adopt a position in the wage structure of the community and attempt to maintain that position.

Thus economic forces operate on wage decisions through the actions of decision makers. If decision makers believe that adjustments in wages are necessary or desirable on economic or other grounds, they make them. If they believe that the organization's present wage-paying position is prudent and acceptable, they do not.

In the remainder of the chapter we classify wage level determinants on the basis of (1) employer ability to pay, (2) employer willingness to pay, and (3) employee (or potential employee) acceptance. Although some of these considerations have been used by arbitrators and wage boards, little is known about how they are used by wage-paying organizations or unions. We therefore emphasize how and when these determinants could be used by organizations.


Ability to pay influences the wage levels of organizations. In fact, a PrenticeHall survey conducted for the American Compensation Association (ACA) found that ability to pay is the most significant factor in changing pay rates: six out of ten respondents ranked it first or second in their list of pay determinants.2

As reported, more profitable firms tend to pay higher wages, whether their profitability is based on the product market, technical efficiency, management ability, size, or some other factor. Likewise, in the early 1980s, concession bargaining in which unions often accepted pay cuts showed the significance of inability to pay.

In a very real sense, wage determination by the organization is an assessment of its ability to pay. The weight attached to other wage determinants may be determined by this estimate. Wages are labor costs to employers, and these costs are high or low depending on what the employer gets for the wage:  the results of effort. What the employer actually pays is labor cost per unit of output; this is the wage costs divided by these results — termed productivity. A prospective wage increase may or may not increase labor cost per unit, depending on anticipated changes in productivity. A wage increase that would be offset by increases in productivity does not increase labor costs and meets the requirement of ability to pay. A wage increase that increases labor costs, however, requires determining whether the increase can be passed on to customers or offset by a reduction in other costs. Success in either effort again meets the requirements of ability to pay.

Similarly, a union presumably attempts to estimate an organization's ability to pay before making its demands. High current profits or favorable future prospects signal ability to pay and strengthen the union's bargaining power.

Some early union contracts tied wages to ability to pay. For example, a 1919 printing agreement tied wages to economic conditions in the industry. Contracts covering motion picture operators have based wages on the seating capacity of theaters. Coal industry agreements have tied wages to the productivity of coal fields. Sliding-scale agreements have geared wages to selling prices.3 Both the United Steelworkers and the United Auto Workers attempted (unsuccessfully) to secure agreements tying prospective wage increases in their industries to company profits.4

Although employers profess to use ability to pay (or inability to pay) as a wage determinant, little is known about how they measure it. An early study found a number of organizations that estimated ability to pay by inserting a projected wage increase into the latest income statement.5 This definition accords closely with the definition contained in a glossary of compensation terms published by the American Compensation Association: the ability of a firm to meet a union wage demand while remaining profitable.6

Although no other published studies of how organizations measure their ability to pay have been found, the study of uses of wage surveys suggests that they do so in a variety of ways. Over a quarter of the firms participating in that study reported that they used wage surveys to evaluate their ability to pay. If by evaluate they meant determine, this would be somewhat surprising, because surveys would logically reflect  willingness to pay.

One attempt was made to determine how organizations measure ability to pay by surveying a local compensation-practices group. This survey suggested much less use of ability to pay than the previously cited ACA/P-H reports.7 Less than one-third of the questionnaires were returned, and none of the respondents offered a measurement method. One compensation professional insisted that ability to pay is irrelevant, that organizations must pay what the market requires. Almost half of the responses mentioned profit targets, and one mentioned ability to compete in the product market. Over half referred to labor markets and union rates, suggesting that willingness to pay is a more important determinant for these organizations.

Actually ability to pay is a composite of the economic forces facing a firm. As such, it involves decisions on how profits should be measured, against what standard (net worth or sales), and over what period. It also involves determining an appropriate rate of return and resolving the issues, such as product development, product mix, and pricing policy, that most affect profits.

These considerations illustrate that although employing organizations and unions may cite ability to pay or inability to pay as a primary reason for wage decisions, no one suggests that it be used as the sole determinant. Such a strict application of ability to pay could lead to very undesirable results.

It would, for example, completely disorganize wage relationships. Wage levels would bear no relationship to the going rate in the labor market. Organizations in the same industry could have vastly different wage levels. Wages would fluctuate widely along with profits. Any semblance of industry wage uniformity (usually strongly desired by unions) would disappear. Low-profit firms employing a high proportion of highly skilled people could have lower wage levels than high-profit firms employing only unskilled labor. In this way, unskilled labor could receive higher wages than highly skilled labor.

Strong limits, moreover, would be placed on economic efficiency. Under a system wherein increases in profits are absorbed by wages, an efficient management would have nothing to gain from increased effort and inefficient management would be subsidized by low wages. In addition, employees could not leave inefficient organizations for more efficient ones, because expansion of output and employment in efficient firms would be forestalled by the paying out of increased profits in wages to present employees. Incentives for management to improve efficiency would be seriously impaired. Possibilities of expansion would be limited.

For these reasons strict application of ability to pay is likely to hold little attraction for the parties. On the other hand, the general economic environment of the economy, the industry, and the firm is important in wage determination. When the demand for the product or service of an organization is strong, when potential employees are relatively scarce, and when prices can be increased without reduction in sales, unions are likely to point to ability to pay and management is unlikely to plead inability to pay. When economic conditions facing the economy, the industry, or especially the organization are unfavorable, management estimates of inability to pay may set a low limit to wage increases.

Union reactions to situations in which a company faces financial hardship are pragmatic: although they are strongly opposed to subsidizing inefficient organizations, the many cases of concession bargaining in the 1981-1982 recession show the strong influence of evidence of company inability to pay.

Although, as mentioned, organizations report using ability to pay as a wage determinant in collective bargaining, such use is subject to strongly held opinions. Most union leaders consider ability to pay as irrelevant unless high profits are apparent. Most employers consider it no business of the union.

The force of ability to pay is probably best seen at the extremes, in judging whether a wage adjustment apparently justifiable on other grounds can or cannot be met. Strong evidence of favorable prospects causes employers to resist less strongly a prospective increase in wage levels. Similarly, strong evidence of unfavorable prospects reduces pressure for a wage increase, especially if it is feared that such a wage adjustment might cause loss of jobs, and greatly increases employer resistance.

Ability to pay is an expression of the economic forces that bear on wage determination. Although it Is a determinant beset by measurement and forecasting problems, search theory suggests that organizations are able to estimate it when a decision calls for it.


Productivity was used earlier in this section as a shorthand term for what the employer gets in return for the wage. Thus wage level determination is often referred to as the effort bargain.

Actually, as will be seen, productivity is a result of the application of human and other resources. As such, it is a prime determinant of ability to pay. If production increases in the same proportion as wage costs, labor cost per unit remains unchanged. If, however, an increase in the wage level is not matched with a proportional increase in productivity, labor costs per unit rise. At some point this mismatch runs the risk of exceeding the employer's ability to pay.

Although productivity is not widely used as an explicit wage level determinant, it is always present in the form of the effort bargain. If the employer gets more output for each unit of input, the organization's ability to pay is increased. For this reason, productivity deserves some discussion as part of the concept of ability to pay.

What is productivity? How is it measured? Productivity refers to a comparison between the quantity of goods or services produced and the quantity of resources employed in turning out these goods or services. It is the ratio of output to input. But output can be compared with various kinds of inputs: hours worked, the total of labor and capital inputs, or something in between. The results of these different comparisons are different, as are their meanings; different comparisons are appropriate to different questions.

Two main concepts and measurements of productivity are used, but for different purposes. The first, output per hours worked or labor productivity, answers questions concerning the effectiveness of human labor under the varying circumstances of labor quality, amount of equipment, sale of output, methods of production, and so on. The second, output per unit of capital and labor ( total factor productivity) measures the efficiency of labor and capital combined. This second measure gauges whether efficiency in the conversion of labor and capital into output is rising or falling as a result of changes in technology, size, character of economic organization, management skills, and many other determinants. It is more complex and more limited in use.

The first measure, output per hours worked, is the appropriate measure to employ in wage questions. It reflects the combined effect of changes (1) in the efficiency with which labor and capital are used, (2) in the amount of tangible capital employed with each hour of labor, and (3) the average quality of labor. It is these three factors that have been found to best explain the long-term trend in the general level of real wages.

It should be emphasized that labor productivity measures the contributions not just of labor alone but of all the input factors. In fact, the potential for estimating the contribution of various factors makes measures of labor productivity at various levels appropriate or inappropriate for use as wage standards.

Output per hours worked

Output per hours worked can be measured at the job, plant, industry, or economy level.

At the job level, it is possible to measure worker application and effort separately from other inputs as the basis for incentive plans. 

At the plant level, estimates of the source of productivity increases can be made the basis of gainsharing plans. 

But at the industry level, productivity improvements cannot be traced separately to the behavior of workers, managers, and investors in the industry. Nor can the contributions of one industry to another industry's productivity be separated. Finally the use of industry productivity as a wage determinant would have adverse economic consequences. For these reasons, industry productivity is seldom suggested as a wage determinant. 

At the level of the economy, changes in labor productivity have been suggested as appropriate for wage determination. In fact, the improvement factor in labor contracts employed in the automobile industry from 1948 until the early 1980s is an example of such a use.

The wage-price guideposts of the 1960s were based on the argument that wage increases in organizations should be determined by economy-wide advances in productivity. This formula use of productivity for wage determination has advocates and opponents. Advocates point out that increasing wage levels in specific organizations in accordance with annual increases in productivity in the economy insures that productivity gains get distributed. They also argue that distributing these gains through price reductions may contribute to economic instability.

Opponents point out that although there is a long-term relationship between productivity and wages, the short-term relationship is highly variable, which suggests that other wage-determining forces are more pertinent. They also argue that tying wages to productivity yields stable prices only when productivity increases are accepted as a limit to wage increases. Obviously, when the cost of living is increasing, limiting wage increases to productivity increases would be unpalatable to employees. Even more unacceptable would be wage cuts when economy-wide productivity declines, as has sometimes occurred.

In auto contracts, the improvement factor was accompanied by a cost-of-living escalator clause and other wage increases. The guideposts broke down when price increases made the limiting of wage increases to economy-wide productivity increases impractical. The effect, of course, is to build higher prices into the cost structure.

The inflationary potential of productivity formulas that are not accepted as limits is enhanced by a tendency to seek a productivity measure that makes larger wage increases feasible. Increases in industry productivity, for example, may be higher, but industry indexes are less reliable and more variable. Such indexes may also conceal the contribution of one industry to another's productivity. Even indexes of national productivity may overstate noninflationary wage-increase possibilities, by failing to measure the effects of transfers of workers from lower- to higher-productivity industries and other sources of increase in labor quality.

Perhaps enough problems have been cited to argue against raising wages in strict accordance with productivity increases. The difficulty of securing acceptance of wage increases based on national productivity as a limit argues against the use of such a formula. Different industries and organizations have such varying rates of change in productivity as to throw wages based solely on productivity completely out of line with other wage considerations. Higher-productivity industries would be penalized for their higher productivity, and this would harm the economy.

Productivity, however, may be interpreted to mean that increases in labor productivity at constant wages lower labor cost per unit. This operates through ability to pay. Productivity may also be employed in the narrower sense -- that a productivity increase attributed to increased performance by employees calls for an equivalent increase in pay (as with merit increases and incentive plans). Although productivity increases are often mentioned in wage level determination, especially in labor negotiations, their effect as a separate consideration is probably minimal.

Whether the slowdown in economy-wide productivity since 1973 and the actual declines in the early 1980s has changed the emphasis on productivity as a wage determinant is controversial. D. Lewin argued that concession bargaining in the public sector is evidence that more emphasis is being given to productivity.8 A special report on productivity at the workplace offers a catalog of programs designed to increase productivity.9 At least two publications purport to show organizations how to measure company productivity.10


Employer willingness to pay may be a more powerful wage determinant than employer ability to pay. Organizations frequently obtain and use information on what other employers pay. Such information is undoubtedly the most-used wage level consideration, sometimes considered along with the cost-of-living. Another determinant of employer willingness to pay consists of the state of supply of particular skills and the presence of tight or loose labor markets. This section devotes some attention to each of these wage determinants.

Comparable Wages

Comparable wages constitute, without a doubt, the most widely used wage determinant. Not only are the wages and salaries of federal employees keyed directly to comparable wages in labor markets, but also those of most public employees in other jurisdictions. Also, unions emphasize "coercive comparisons," and private organizations consciously try to keep up with changes in going wages. Perhaps the major reason for this widespread use of the concept of comparable wages is its apparent fairness. To most people, an acceptable definition of fair wages is the wages paid by other employers for the same type of work. Employers find this definition reasonable because it implies that their competitors are paying the same wages. In essence then, labor costs become even across the industry. Another reason for the popularity of the concept is its apparent simplicity. At first glance, it appears quite simple to "pay the market."

However, this illusion of simplicity vanishes once we try to "determine the market rate." Precise techniques, carefully employed, are required to find comparable jobs and comparable wage or salary rates. Numerous decisions must be made on which organizations and which jobs should be compared and how. Equally important are decisions concerning how to analyze the data and use them. Wage comparisons may involve other organizations in the area or in the industry, wherever located. An important question to consider is whether differences in competitive conditions in the product market are significant enough to warrant a different wage level, regardless of labor-market influences.

The going wage is an abstraction, the result of numerous decisions on what jobs and organizations to include, what wage information is appropriate, and what statistical methods to employ. Some employers decide to pay on the high side of the market, others on the low side. The result is a range of rates to which various statistical measures may be applied. Various interpretations of the going rate may be made and justified.

To rely on comparable wages as a wage determinant is to rely on wages as income rather than as costs. Comparable wage rates may represent entirely different levels of labor costs in two different organizations. Setting wage levels strictly on the basis of going wages could impose severe hardships on one organization but a much lower labor cost on another.

These difficulties are not insurmountable: many employers lean heavily on wage and salary surveys. Employer choices on what surveys to acquire and use, what benchmark jobs to attend to, and how to analyze, interpret, and use the data suggest that reasonable accommodation to "the market" is usually possible.

In addition to offering a certain measurability, following comparable wages contains a good deal of economic wisdom. Wages are prices. One function of prices in a competitive economy is the allocation of resources. Use of comparable-wage data operates roughly to allocate human resources among employers.

Furthermore, comparisons simplify the task of decision makers and negotiators. Once appropriate comparisons are decided upon, difficulties are minimized. A wage level can be set where the wage becomes satisfactory as income and operates reasonably well in its allocation function. Wages as costs are also satisfied because unit labor costs can differ widely between two organizations having identical wage rates; also unit labor costs can be identical in two organizations having widely different wage rates. That unit labor costs fluctuate more than wage rates and are capable of variation, as employer action permits satisfactory adjustment to some level within the range of going rates.

Comparable wages also operate as a force for generalizing changes in wage levels, regardless of the source of change. Unfortunately, however, although changes in going wages tell what occurred, they don't tell why it occurred. The changes may represent institutional, behavioral, or ethical considerations more than economic ones.

On balance, however, comparable wages probably operate as a conservative force. Because wage decisions involve future costs, employers are understandably unwilling to outdistance competitors. In a tight labor market, changes in going wages may compel an organization to pay more to get and keep a labor force, especially of critical skills. But in more normal periods, where unemployment exceeds job vacancies, employers will more likely focus on equalizing their labor costs with those of product-market competitors. In other words, comparable wages are followed as long as other considerations are not more compelling.

Cost of Living

Cost of living is emphasized by workers and their unions as a wage level consideration when it is rising rapidly. In such times, they pressure employers to adjust wages to offset the rise. In part, these demands represent a plea for increases to offset reductions in real wages (wages divided by the cost of living). In part they represent the recognition that when the cost of living is rising rapidly, the economic position of most employers is changing in the same direction. Wage pressures resulting from changes in the cost of living fluctuate with the rapidity with which living costs rise; however, price rises in most years since 1940 have produced employee expectations of at least annual pay increases. To employees a satisfactory pay plan must reflect the effect of inflation on financial needs.

Employers understandably resist increasing pay levels on the basis of increases in the cost of living unless changes in going wages fully reflect these changes, which they seldom do. Although increases in the cost of living are partially translated into wage increases by most employers through payment of comparable wages, long-term contracts with unions have fostered other methods of incorporating cost-of-living changes. One such method is the reopening clause, which permits wages to be renegotiated during a long-term contract. Another is the deferred wage increase, an attempt to anticipate economic changes at the time the contract is signed. A third is the escalator clause by which wages are adjusted during the contract period in accordance with changes in the cost of living. In this third method, living-cost changes are measured by changes in the Consumer Price Index.

Escalator clauses vary in popularity from year to year in accordance with the rapidity of cost-of-living changes during the period immediately preceding the signing of the contract and with anticipation of subsequent rises. In some years, as many as 60 percent of workers under large union contracts were covered by escalator clauses. Reduced inflation, however, tends to reduce their popularity.

Nonunion employers are much less likely to adjust wage levels in accord with changes in the cost of living. But some do so by granting general increases based at least in part on these changes. For example, in the late 1970s double-digit inflation prompted many nonunion employers to make cost-of-living adjustments. Most employers, however, while painfully aware of the effects of inflation on the real income of employees, based wage level changes on changes in going wages.

Employing the cost of living as a wage-level determinant is somewhat controversial. Wage rates do tend to follow changes in the cost of living in the short run. Tying wages to changes in the cost of living provides a measure of fairness to employees by assuring them that their real wages are not devalued.

But using the cost of living as a determinant also implies a constant standard of living — a treadmill. Historically, unions have opposed the principle for this reason. Methods that provide the same absolute cost-of-living adjustment for all employees may actually impair fairness to employees. Such flat adjustments imply that everyone's cost of living is the same and has changed by the same amount. Unfortunately, technical problems in measuring changes in the cost of living may make such effects inequitable.

Cost-of-living index

A cost-of-living index measures changes over time in the prices of a constant bundle of goods and services. The bundle of goods and services (called a market basket) is obtained by asking a group whose cost-of-living is to be measured to keep a record of their purchases and then sample from it.

The Bureau of Labor Statistics (BLS) has been publishing such an index since 1921 —  the Consumer Price Index. The CPI was developed to measure the cost of living for families of urban wage earners. As such, it became the basis of escalator clauses in union contracts.

Like any general index, the CPI is an abstraction that rarely corresponds with the actual living-cost changes for any given family. Differences in consumption patterns among family units due to differences in family composition, age, income, tastes, and other characteristics mean that the CPI varies greatly in its ability to measure cost-of-living changes for various groups. Moreover, consumption patterns change over time, as does the quality of products.

At present, two indexes are published: the CPI-U and the CPI-W. The CPI-U represents all urban households including urban workers in all occupations, the unemployed, and retired persons. The CPI-W represents urban wage and clerical workers employed in blue-collar occupations. Both CPI measures exclude rural households, military personnel, and persons in institutionalized housing such as prisons, old age homes, and long-term hospital care.

The BLS has made changes to improve the index over time and to meet specific problems. The latest change to both indexes involved substituting a rent equivalent for home ownership, because high interest rates had skewed upward the cost of home ownership.

Obviously, such technical problems mean that tying wage levels to the CPI varies in fairness to different groups. Moreover, at least in unions and perhaps in most organizations, fairness seems to suggest the same cost-of-living adjustment for everyone. A compressed wage structure resulting from flat cost of living increases may produce difficulties in recruiting and keeping higher-level employees. It seems that changes in the cost-of-living do not closely parallel changes in the supply-demand situation of any specific employee group. Also, particular organizations and industries may face competitive situations in product markets that run counter to changes in living costs.

It also seems that wage increases that fully reflect living-cost increases build inflation into the economy. Fortunately, although escalator clauses do narrow the time gap between price and wage changes in an inflationary period, they have been found to yield only about 57 percent of a year's inflation, and they apply to only about ten percent of nonagricultural civilian employment.12 Although labor contracts containing wage reopeners, deferred increases, or escalators are prevalent in the United States, most wage level decisions are widely decentralized and give heavy weight to comparable wages. This may provide enough lag between price and wage changes to prevent more inflationary effects.

In summary, the cost of living as a wage level determinant usually operates indirectly. Although attractive to employees, unions, and some employing organizations in periods of rapidly rising prices, it should never be used as the sole standard of wage adjustment. When influences in the labor market are stronger than those in the product market, cost-of-living considerations may increase an employer's willingness to pay. But when an employer is faced with strong competition in the product market, employees may have to choose between maintaining their real wages and maintaining their jobs. In inflationary periods, the cost of living reinforces going wages through employer willingness to pay.

Labor Supplies

One consideration always present in wage level determination is the ability of the organization to obtain and hold an adequate work force. The wage level must be sufficient to perform this function or the organization cannot operate. Effectiveness of recruitment efforts, refusal of offer rates, and labor turnover levels may be considered in wage level decisions. Wage level is only one determinant of recruitment effectiveness and labor turnover. But it is an important one in that it is usually agreed to be the major element in job choice.

Some organizations experience serious shortages of certain skills. A shortage of young labor-force entrants in the 1990s brought this experience to many organizations. In the face of such shortages, organizations may feel that they have no choice but to raise wages to attract the needed skills.

If, however, the organization experiences no recruitment or turnover problems, it may presume that the present wage level is adequate to permit securing and holding a labor force. But quality issues require answers. Is the quality of the labor force being maintained, or have employees of lower efficiency been the only ones available at the present wages? Is the quality of the present labor force adequate? Is it more than adequate? Is a change in standards of employability a good idea? Can such a change be accomplished at present pay levels?

Such questions emphasize the point that it may be more important to maintain the quality of a labor force than the quantity. A labor force of low quality at a given wage level may be more costly to the organization than a labor force of higher quality obtained at a higher wage level but resulting in lower unit labor costs. If an employer can lower unit labor costs by raising the wage level and standards of employability, such a course may deserve careful consideration.

This approach partially explains the existence of wage leaders. Organizations that pay "on the high side" may do so in the hope of attracting a higher-quality labor force. Wage leadership may not only permit "skimming the cream" off the present labor force, it may ensure a continuing supply of high-quality personnel from new entrants. Some companies always have a waiting list of applicants, whereas others must continually use an aggressive recruitment program. Labor-market studies have consistently shown that most employees find jobs by applying at the gate and by obtaining information from friends and relatives. Such practices work to the advantage of those firms known as high-paying organizations.

Wage level decisions based on labor-supply considerations must be made in light of the prospects of the organization and the industry. Firms in declining industries may be forced to allow wage levels to drop with reduced productivity and to plan on less efficient and lower-paid work forces. An expanding organization, on the other hand, may want to upgrade the quality of its work force by paying above the market and raising standards of employability.

The extent to which labor-supply considerations affect wage levels apparently varies greatly among organizations. Organizations in high-wage industries in low-wage areas experience few labor-supply problems. But those in low-wage industries may face serious labor-supply problems. Although most organizations fill most of their jobs from within, it is doubtful that any organization lacks labor-supply problems for at least some skills.

As emphasized in Chapter 2, most organizations operate in numerous labor markets. Not only does the extent of the market (local, regional, national, or international) vary for different skills, the use of internal labor markets varies among organizations. Those with relatively open internal labor markets fill most jobs from outside. Those with relatively closed internal labor markets fill almost all jobs from within.

Obviously, labor-supply considerations affecting wage levels vary with labor markets. Jobs filled externally must meet or exceed the going rate. Jobs filled internally are constrained only by organization decisions. In both situations, the organization is able to vary its pay levels and hiring standards on the basis of its willingness to pay.


The considerations employers use in determining wage levels obviously meet their test in employee or potential-employee acceptance. If employees are unwilling to accept the wages offered, the employment contract and the effort bargain are not completed. This statement suggests that all of the factors discussed in the environmental chapter (2) are potential wage level determinants. For example, employee expectations, employee definitions of equity, and employee satisfaction or dissatisfaction with pay become pertinent considerations. So do the demands of unions and society (through laws and regulations). Ideally, these considerations find their way into employers' decisions regarding their ability and willingness to pay.


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