Factors Affecting Wage
Determination
Part 1
Theory of Labour Markets
• Definition: labour market is market in which
workers compete for work and employers
compete for workers.
• Salamon (2000): ‘labour market ‘ may be viewed
as the way work is distributed in society.
Elements – pay (level and distribution); work
patterns (level, structure and organization)
• Daft (2005): labour market represents people in
the environment who can be hired to work.
Theories
• Economic approach: wages as a pricing
mechanism regulates the supply and demand of
labour; affects inflation and employment as well.
Assumptions:
- Income expectation is derived from what an
individual is compensated for work in lieu of
leisure (utility function)
- The organization makes its decision about wages
based on how productive labour is
- The supply and demand for labour compete through the
pricing mechanism of wages in order to reach the point of
equilibrium where everyone willing to work at the given
wage is employed.
Sociological approach: seeks to explain how the market
allocates job between groups of people. Overtime,
specialisation of labour has given rise to social hierarchy i.e
different work has different value. The labour market
depends on the social acceptance of social hierarchies.
Manifestations: division of work, skilled vs. unskilled; the
concept of professions and the desire of others to be
accorded the same status.
Concepts
• Dual labour market – involves one market in
which supply and demand opeerates freely and
another where employment is isolated from
competition.
• Passive labour markket policies – payments to
support people during unemployment.
• Active labour market policies – measures such as
training on the job support programmes intended
to influence the level and structure of supply and
demand for labour.