Factors Influencing Wage Setting Essay

Following factors influence wage setting.

Supply and Demand of Labour:

The labour market conditions or supply and demand forces operate at the national, regional and local levels, and determine organizational wage structure and level. If the demand for certain skills is high and supply is low, the result is a rise in the price to be paid to these skills.

Prevailing Market Rate:

This is known as the ‘comparable wage’ or ‘going wage rate’, and is the widely used criterion. An organization compensation policy generally tends to conform to the wage rate payable by the industry and the community. This is done for several reasons. This results in a considerable uniformity in wage and salary rates.

The Organizations Ability to Pay:

Wage

The outcome of the bargaining process depends on two things: the bargaining power of each party and the outside options of each. The party with the most bargaining power—the worker or the firm—is the one that can extract a larger fraction of the surplus that stems from their relationship. The outside options for both workers and firms depend on the income of each if they stay unmatched as well as their ability to locate alternative partners if the negotiation fails.

Outside options are affected by the “imbalances” of the labor market—the number of vacancies and the number of unemployed workers. Wages respond to changes in outside options as follows. If the number of vacancies per unemployed worker (a measure of the scarcity of workers often referred to as labor market tightness) is large, then workers’ outside options are good and they can ask for a high wage. Firms are willing to pay this high wage to avoid having to look for another worker and incurring high recruiting costs. But if vacancies are scarce relative to unemployed workers, then workers’ outside options are poor, and they are willing to accept low wages to avoid a long spell of