DETERMINANTS OF THE WAGE STRUCTURE
Adam Smith explains occupational wage diﬀerentials in terms of (1)
hardship, (2) diﬃculty of learning the job, (3) stability of employment, (4)
responsibility of the job, and (5) chance for success or failure in the work.
This is a theory of wage structure. But his standards of worth are equally
useful in explaining the complexity of wage structure decisions. The market
value of an item is the price it brings in a market where demand and supply
are equal. Use value is the value an individual buyer or seller anticipates
through use of the item. Use value obviously varies among individuals and
These two concepts of worth and the concept of internal labour
markets combine to explain important diﬀerences among employers in wage
structure decisions. Organizations with relatively open internal labour
markets (organizations in which most jobs are ﬁlled from outside) make
much use of market value. They also make much use of wage and salary
surveys in wage structure decisions.
Conversely, organizations with
relatively closed internal labour markets (most jobs are ﬁlled from inside)
emphasize use value. Their analysis of job worth relies more heavily on
perceptions of organization members of the relative value of jobs.
Some other wage structure determinants derived from economic
analysis may be noted. Training requirements of jobs in terms of length,
diﬃculty, and whether the training is provided by society, employers, or
individuals constitute a primary factor in human-capital analysis and thus
job worth. The interaction of ability requirements with training requirements
can yield diﬀerent job values depending on the scarcity of the ability
required and the number of people who try to make it in the occupation and
Employee tastes and preferences are another economic factor.
People diﬀer in the occupations they like and dislike. In like manner,
occupations have non-monetary advantages and disadvantages of many
occupational choice and thus labour supplies. Unfortunately, labour-market
information is far from perfect, and responses to labour-market shortages
are likely to be more prompt than responses to oversupplies.
Industrial as opposed to craft unionism has also been shown by
economic analysis to aﬀect wage structures. Industrial unions, with their
heavy proportions of semiskilled members, are more likely to favor absolute
increases. Although large organizations where employees are represented
by industrial unions may have a highly diﬀerentiated wage structure, they
pay less attention to percentage diﬀerentials than they would in the
presence of craft unions.
Another economic determinant is discrimination. Although wage
diﬀerentials based on sex or race are unlawful, they still exist. The extent to
which such diﬀerences are based on productivity diﬀerences or represent
discrimination is very much a wage structure issue.
Industrial Relations Explanations
Industrial relations scholars' explanations of wage structures tend to
be diﬀerent from those of labour economists. For instance, an employer
concerned with the status of his or her organization as a dependable
supplier, a considerate employer, or a wage leader is more likely to base
wage structure decisions on organization criteria than on economic forces. A
short list of non-economic considerations on wage structures emphasized by
industrial relations scholars would include organization goals, the health of
comparisons, communication of pay decisions, and seniority policy. Also
emphasized by these analysts is the force of custom.
One powerful analysis of considerations in wage structure decisions
argues that wage structures keyed solely to the labour market are likely to
be few, to result from very tight labour markets, and to be characteristic of
organizations well insulated from product-market competition, unions, and
technological change. One author classiﬁed organizations as having wage
structures that are primarily oriented toward unions, markets, internally, or
industrial unions. This classiﬁcation suggests that in only one of the four
market-oriented organizations, does the labour market drive the wage
The just-price theory advocated setting wages in accordance with the
pre-established status distribution: wages were to be systematically
regulated to keep each class in its customary place in society. The theory
emphasized equity, the tying of wages to status, and the preservation of
customary relationships. But whereas social forces generally operate to
maintain what is customary and accepted, market forces have been
operating to narrow diﬀerentials. Market forces usually operate through the
shifting of labour supplies. One reason that social forces seem to
predominate is the slow reaction of supply to price. Supply shortages are
more eﬀective in raising pay than supply surpluses are in lowering it.