Wage differentials - compensation management - Manu Melwin Joy
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Transcript of Wage differentials - compensation management - Manu Melwin Joy
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Manu Melwin JoyAssistant Professor
Ilahia School of Management Studies
Kerala, India.Phone – 9744551114
Mail – [email protected]
Wage differentials
• The wage paid to workers
varies greatly. These wage
differentials are mostly the
result of differences in
worker ability and the
workers' effort in performing
the job.
Wage differentials• There are also wage
differentials across occupations, because of differences in the demand and supply of laborers for particular job or occupation. These differences arise primarily because of differences in the amount of education or training required and in the desirability of the job itself.
Occupational Wage Differentials• Obviously, certain
occupations pay more than others. Surgeons make more than teachers, who make more than retail salespeople. Most of these wage differentials are the result of educational and training requirements, what is often referred to as human capital.
Occupational Wage Differentials• Surgeons require more
than a decade of education and training after high school before they can earn a living as surgeons, while retail salespeople can get a job right of the high school, or even while they are still in school.
Occupational Wage Differentials• Education and training limit the
supply of labor in that they take a certain amount of time to complete and require a certain level of skill. In many cases, people who attend college or training school do not have the time to work a full-time job. Therefore, they also incur an opportunity cost which is equal to the amount of money that they could have earned had it not been for the educational or training requirement.
Occupational Wage Differentials• Another primary factor that
determines wages is the demand for the worker, which is a derived demand for the product or service that the worker provides. If the worker provides a product or service that is highly desirable, then a higher wage will prevail for a given supply of workers who could do that job.
Occupational Wage Differentials• Sometimes, ability makes a
very large difference in wage potential that far outweighs the differences in ability. The winning horse earns a lot more than the one that comes in 2nd even though it is only a little faster. There are only so many jobs for professional athletes, so only the very best are going to be chosen for those high-paying jobs.
Occupational Wage Differentials• Likewise, only the best
musicians or those producing the most desirable music will become wealthy. People only have so much time and money for entertainment, so they tend to select entertainment performed by the best people, especially entertainment package for mass consumption.
Compensating Differentials
• Some jobs pay more
because they are less
desirable. They may be
hazardous, dirty, and
employment may be
sporadic or seasonal.
Compensating Differentials• For instance, construction
pays more than retail sales because of these compensating differentials, which are nonmonetary differences between jobs where higher or lower wages are paid because of differences in the desirability of the job itself.
Compensating Differentials• Most retail jobs take place in air-
conditioned or heated stores where the worker can wear nice clothing, stay clean, engage in friendly conversations with customers, and expend little physical effort. By contrast, construction workers may perform hazardous work, will become dirty during the job requiring them to spend additional time cleaning up afterwards, and will often have to work long hours to get the job finished, and they may not get work during the winter months. Hence, to attract enough workers to construction, the industry has to pay more.
Compensating Differentials
• In many cases, status or
power, or the lack thereof,
may also be a compensating
differential. After all, you
never hear a kid saying I
want to grow up to be a
garbage collector.
Compensating Differentials• On the other hand, much
more money is spent to elect someone to the presidency of the United States than they will ever earn at the job, and many lawyers make more than Supreme Court justices, yet few lawyers would turn down an appointment to the Supreme Court.
Wage Differentials Due to Locality
• For any given type of job,
wages are usually higher in
one locality than in others.
Much of this difference is
because of differences in the
cost-of-living.
Wage Differentials Due to Locality • However, most people are
reluctant to move because they do not want to leave their friends, sell their house, be subjected to the cost and uncertainty of a new job in a new community, and the children may not want to change schools.
Wage Differentials Due to Locality
• People may also be unwilling
to give up pension plans,
health insurance, or seniority
at their current job. Hence,
wage differentials in different
localities may persist, even if
people know that higher
wages can be earned
elsewhere.
Wage Differentials Due to Locality • The requirement for
occupational licensing may also be an impediment to moving to a different area for higher wages. Many occupations require state licensing, such as law and medicine, so if a licensed worker wanted to move to a new state, she would have to obtain a new license and may have to satisfy additional requirements.
Wage Differentials Due To Market Imperfections
• In economics, there is a presumption that people will migrate to higher paying jobs from lower paying jobs of the same type and with the same requirements. However, this can only happen if people know about the jobs.
Wage Differentials Due To Market Imperfections
• People tend to look for jobs in their own locality by searching the local newspaper or local Internet listings. Moreover, many people get jobs from their network of friends and acquaintances, who tend to live in the same area.
Wage Differentials Due To Market Imperfections
• Hence, the lack of
information can lead to
persistent differences in
wage differentials for the
same type of job.
Performance Pay• Many occupations pay a wage
rate that is commensurate with performance, such as sales or managerial occupations. The purpose of performance pay is to attract the most highly qualified and productive workers, or as economists like to say, workers with highest marginal revenue productivity.
Performance Pay• Performance pay is also used
to motivate workers to work. Many employees paid a flat wage rate often linger or dawdle, which lowers their productivity and the employer's marginal revenue product. Dawdling employees can also lower morale, since harder working employees resent being paid the same as the dawdling employees.
Performance Pay
• Performance pay helps to
solve this principal-agent
problem by aligning the
interests of the employees
with that of the owners of
the firm — both want to
make more money.
Performance Pay
• There are various types of
performance pay. Piece rates
are paid according to the
amount of work
accomplished. Many
factories use piece rates to
prevent dawdling.
Performance Pay
• Commissions are often paid
as a percentage of sales, in
such industries as real
estate, insurance, securities,
and retail sales.
Performance Pay• Royalties are paid to artists
who actually create a product and, like commissions, is usually a percentage of the sales price of the product. For instance, authors may receive 10% of the price of a book for each book that they sell.
Performance Pay
• Bonuses and stock
options are often paid to
executives of the
company so that they
work harder to ensure
that the company will
succeed
Performance Pay
• Bonuses are lump sum
payments which are
often paid at the end of
the year after the
employee's performance
can be assessed.
Performance Pay
• Stock options align the
interests of executives of
the company with those
of the shareholders — if
their shareholders profit,
then they will too.
Performance Pay
• Profit-sharing plans are
often used to pay a
percentage of the firm's
profits to employees so
that they work harder.
Performance Pay
• Firms may also pay
efficiency wages, which
are higher than market
wages, to attract more
productive workers.
Performance Pay
• Efficiency wages may
lower the firm's cost of
labor by hiring only
productive individuals and
lower turnover, which can
result in a more
experienced workforce.
Performance Pay
• Consequently, recruiting and
training costs are also lower.
Good employees also
require less supervision and
monitoring.
Drawbacks to Pay Incentives
• Piece rates may result in
sloppy work as workers
rush to make more
money.
Drawbacks to Pay Incentives
• Commissioned salespeople
often exaggerate claims, or
even lie, to make a sale, and
oftentimes, the product is
not in the best interest of
the customer.
Drawbacks to Pay Incentives• Because profit sharing plans
apply to all workers at a firm, less productive employees will receive the same pay incentive as more productive ones, which may cause resentment by the productive workers and anger that they are not making as much money as they could be, since how much they are ultimately paid depends on how hard the others work.