How Wage Differentials Exist in Labour the Market - Literature review Example

How Wage Differentials Exist In Labour The Market al Affiliation How Wage Differentials Exist In The Labour Market Introduction A labor market definitively pertains to environments in which both workers (labor force) and employers interact with each other. accordingly, employers continuously compete to hire the very best of available labor force, with the existing workers also competing for the best available and satisfying jobs. Thus, a labor market functions in relation to the prevailing supply and demand of labor. In a normal market context, the prevailing labor demand refers to the firm-entity’s demand for labor vis-à-vis supply referring to the existing and potential supply of labor by workers. Accordingly, wage differentials prevail within various market settings, influenced by the prevailing dynamics pertaining to the demand and supply of pertinent labor force (Freeman, 1997). Definitively, wage differentials pertain to the existing differences in pay/ wages between workers equipped with different skill-sets and capacity working within a given industry. On the other hand, it also pertains to differences in wages between workers with similar skill-sets/ capacity, working in different market-regions or industries. The paper will discuss how wage differentials exist within labor markets, influenced by the dynamic nature of the supply and demand of labor. Accordingly, the paper will delve on the issue of labor market functionality, in relation to the prevailing demand for goods and services. This is influential towards better understanding the existing dynamism within specific market arenas, thereby affecting upon not only the demand for labor, but pertinently so its supply. This will be carried out through a theoretical analysis and subsequent literature review of the economics behind the ‘demand and supply of labor’ A conclusive summary will recap all discussed issues, which showcase various reasons why wage differences exist within varying labor markets. The Labour Market A labor market pertains to the nominal market arena where workers are able to find work that pays employers able to tap into a willing workforce, and where the prevailing wage rates are determined. Accordingly, as Freeman (1997) portray, labor markets can be local, national, regional and even international, in terms of scope. In such contexts, these exist in the form of smaller, interacting labor markets arenas, for various skill-sets/ capacity, geographical locations and qualifications/ expertise. An important point to note is the prevailing dependence on the constant information exchange between job seekers and hiring employers. This is mainly about geographical job location, employment conditions and prevailing levels of competition amongst others. Pertinent to this discussion is the aspect of labor economics, which seeks to better understand both the dynamics and functioning of the labor market. This is informed by the fact that labor markets function through constant interaction between the ‘hiring’ employers and the ‘job-seeking’ workforce (Freeman, 1997). Thus, labor economics mainly focuses on the workers (suppliers of labor services) in relation to the ‘hiring’ employers. In addition to this is the attempt at understanding the resulting patterns of employment, income and wage-rates. In the field of economics, labor is regarded as the measure of the work-input done by the ‘hired’ workforce. Conventionally, it is contrasted with other core factors of production i.e. capital and land. As Benjamin, Morley and Craig (2002) aver, wage is the avenue of basic compensation for paid labor-input, with the wage rate regarding such compensation measured per a period. thus, wage pertains to the payment made per a measurable unit of time, usually an hour, with labor earnings hence regarding the accrued payment over a given time-frame i.e. weekly, monthly or yearly basis. Accordingly, total compensation can be defined as regarding the overall earnings plus other accrued benefits for labor-input. income is thus regarded as the total labor compensation accrued that is augmented with the ‘unearned’ income. In equal measure, economists regard economic rent as being the existing total labor compensation, minus the opportunity cost incurred. Therefore, the measurement of labor is usually in terms of total hours inputted, overall efficiency or total wages provided (Benjamin, Morley & Craig, 2002). Influential in this regard, is the dynamic nature ‘bargaining power’ that is influential to the demand and subsequent supply of labor, in a given market arena. The Labour Market: A Theoretical Analysis Various theories have been developed, based upon the concept of ‘human capital’, which refers to the skill-sets possessed by existing labor forces, and not necessarily based upon their actual labor input. accordingly, as Lazear and Paul (2004) elude, labor demand as a derived demand, is based upon not the aspect of hiring labor for its own sake, but rather upon the fact that it aids in terms of producing critical output. hence, it contributes to not only the employer’s revenue but also the profits realized because of available labor input. pertinent theories in this regard include: the theory of labor market segmentation and the split labor market theory. The theory of labor market segmentation is founded upon the notion that over time, and because of market diversification and globalization, different professionals are able to work competitively in completely diverse job markets. Pertinent to this is the aspect of geography, industry and occupational capacity of the labor market. In terms of the geographic labor market, it pertains to the aspect that neither the prevailing workforce, nor the employers can relocate to other areas without acquiring considerable expenses. Thus, the prevailing wages are often higher in big urbanized areas i.e. cities and municipalities, as opposed to smaller cities and towns (Lazear & Paul, 2004). Comparatively, the split labor market theory is based upon the original proposals of sociologist Edna Bonefish (early 1970s), who attempted to explain the prevailing labor market segmentation. Benjamin, Morley and Craig, (2002)elude that this was by way of ethnicity/ race in terms of political power and social structure, as opposed to individual-level prejudice. This was in addition to explaining the influential nature of existing racial/ ethnic tensions. She was of the argument that ethnic/ racial antagonism emerges initially from labor market splits. This is where two or more ethnically/ racially distinct workforce groupings vie for the same job opportunities. Additionally, is the presence of the employer’s total cost (inclusive but not limited to wages) of engaging workers from a given group being considerably lower than that incurred from hiring employees from another grouping. The employers (capitalists) usually prefer hiring cheaper labor, and hence will often do so whenever there is an absence of opposition from workers who are higher-priced. This results in the creation of antagonism between the lower- and higher-priced groupings. Accordingly, differences in terms of labor pricing are both political and sociological in nature, and not a matter of the personal preferences present (Benjamin, Morley & Craig, 2002). Thus, native and unionized workers who have a platform on which their political rights are considered usually will demand higher wage rates. This is in addition to the fact that such a work force can portray resistance to the employer prerogatives, rather than what undocumented immigrant and often un-unionized workers are able to. Accordingly, she was of the view that the likely outcomes of such as split within the labor market include antagonism and a ‘caste-like’ system in which lower-priced work forces are subsequently restricted to specified occupations. This in dependent on the prevailing political power which in extreme cases, can result in total exclusion from the existing labor market (Bruce & Cheslak, 1978). Wage Differentials in the Labour Market Critical is the need to analyze both demand and supply of labor taken together. In terms of occupational and industrial labor markets, these often arise because of the division of labor, subsequently being influential to the increased specialization and labor-output differentiation. Accordingly, Acocella, Giovanni and Douglas (2008) project that the prevailing industrial labor markets necessitate the continuous retention of skilled workforce, due to the difficult nature of workers being unable to switch between different occupations. This is influenced by the fact that such relocation to other occupations would subsequently necessitate different skill-sets and extensive investment in capacity building and training. Informative is the fact that by specifying the minimum experience and qualifications/ expertise required there is greater restriction of entry into other occupations, even when such occupations are affiliated i.e. in the case of doctors and the nursing fraternity. Gaining dominance in the 1960s, the theory aided in the presentation of labor markets as market areas where people posses individual capacity, skill-sets and characteristics i.e. motivation and education. Another important aspect is the crucial input of technology and the globalization effect, which has and continues playing a critical role about production output (Acocella, Giovanni & Douglas, 2008). Accordingly, this perception was instrumental in terms of the outlook of the market’s demand-side, in addition to the strategy and nature of the existing employers. As a result, the ideal of ‘non-competing groups’ has been founded in different theoretical frameworks which are encompassed under the generalized label of the theory of labor market segmentation. It contrasts with the neo-classical economic theory that posits the presence of a unified labor market, consisting of sellers and buyers within an environment of open competition. In this regard, the labor market is viewed as functioning similarly to other forms of markets (Lazear & Paul, 2004). Accordingly, within this conceptual model, the only prevailing difference existing between working conditions and workers’ wages, is because of individual workers differences in terms of formal education, tastes, experience and possessed skill-sets/ capacity. critical in this regard as portrayed by Wei (2008), is the theory of compensating wage differentials, where workers who prefer dirty or risky jobs are able to receive higher salaries or wage-rates, as opposed to their counter-parts in clean or safe job occupations. Thus, prevailing differences in terms of compensation for labor-input only arise on the labor supply side. Informative is that fact that as founded on the theory of labor market segmentation, there is the presence of critical differences within the demand side. This thus is implicit of the subsequent differences in terms of compensation and others not based upon the characteristics of individual workers. Since labor markets are never perfect, the presence of non-market institutions i.e. professional associations and workers/ craft unions is important in terms of role-play (Wei, 2008). So too, are the various strategies that are employed by the existing employers, about the production of varying results for workers possessing similar characteristics. Typically, as Hacker (2000) eludes, the segmentation of labor markets splits the existing aggregate labor market between the primary and secondary sectors. The two key formulations of the theory are hence split into general labor market theory and the internal labor market theory. Pertinently, the labor market segmentation theory delves around identification of the split between the primary and secondary sector analytical divisions. Within the primary sector, the prevailing workforce (as a whole) is generally motive towards serving employers because of existing benefits to be accrued i.e. wages, job security and pension, as well as health benefits amongst others. with job markets consisting majorly of white and blue-collar jobs, this sector majorly contains the better-paid, higher-status and higher-grade jobs (Hacker, 2000). Here, employers on their part offer the best working conditions and terms. Such jobs are mainly considered to primarily pertain to occupational and some industrial labor markets. Hence, Benjamin, Morley and Craig (2002) portray that primary workforce continuously tries to prove their worth to employers by way of exhibiting their educational credentials and skill-sets/ capacity. Within the secondary sector, which pertains to mainly the low-skilled labor employment, job management possesses complete because of the high turnout rates. This is informed by the fact that many within this job sector either are replaced or leave quickly. There is little emphasis on job morale, with the existing workforce lacking motivation. In addition, there is need for relatively low training of the workforce. Few barriers existing in terms of job mobility, because of the unattractiveness of the jobs present, with little incentives to stay existing. Thus, higher levels of labor turnover are experienced, with wage rates being low as influenced by the poor conditions and terms of the job (Benjamin, Morley & Craig, 2002). In regard to the split labor market theory, the presence of dynamics within the labor market has resulted in the formation of three labor classes/ groupings i.e. Businesses/ Employers (White Capitalists), Higher Paid Labour (the primary sector) and Cheaper Labour(the secondary sector). conflict has and continues to develop between the three classes, essentially based upon the prevailing differences of their interests. Business firm-entities or employers (White Capitalists) often strive to have a more docile and hence cheaper labor force, in the aim of enhancing not only their overall competitiveness, but also the maximization of their economic returns (Bruce & Cheslak, 1978). To be noted is that business will always strive to dispense with, and/ or undercut this class when able. In fact, business has often done so, whenever opportunities have been presented. The Higher Paid Labour on its part is often threatened by the introduction of cheaper labor, constantly fearing that such a move would force either the reduction of their pay rates or their exit from the workplace. Accordingly, whenever this class possesses power resources or is strong enough, it is able to either undercut or prevent replacement by cheaper labor. This is often carried out through either the creation of ‘caste-like’ labor systems (aristocracy or exclusiveness of labor) or through association in exclusion movements (Hacker, 2000). Cheaper labor as the final labor group is often negatively utilized by employers to effectively undermine the position and ‘bargaining power’ of the more expensive (higher paid labor). Simon (2005) avers that this is often through such methods as undercutting and strikebreaking, where focus is placed upon utilizing cheaper labor because they are usually unskilled, and hence easily trained. Towards better understanding the prevailing dynamics, there is need for discussion of the economics of discrimination. The presence of discrimination in the labor market is attributed to the prevailing social structure, as opposed to potential and/or existing individual preferences. According to pundits, this is a type of conflict theory that perceives discrimination as a direct result of the conflict between various competing interest groups. Thus, the Capitalist/ business owner perceives the racial discrimination as being dysfunctional in terms of the business enterprise thereby preferring not to engage in any form of discrimination. This is based upon the objective that critical to the capitalist is the need to acquire the best workforce/ labor for the cheapest wage rates, and therefore of importance not to discriminate (Simon, 2005). Informing this notion is the fact that discrimination is viewed as detrimental due to its limitation of the workforce pool that is available for a given position of labor. Hence as Bauder (2006) avers, those who are viewed as being discriminatory when engaging in hiring procedures, do engage in this not because they have a liking/ tendency of discrimination, but rather as a result of other factors. An example would be due to their being forced into discrimination by existing labor that wants to benefit. This is especially true in reference to higher paid workforce, which may possess the capacity to aptly impose such a system of discrimination through a variety of avenues. Of fundamental importance is the fact that discrimination within a ‘split’ labor market occurs due to the presence of such higher paid workers benefitting when they are able to eliminate both actual and potential minority competition. The presence of ethnic/ racial antagonism is often as a result of rising competition founded on labor force wage price differentials. Pertinently, is the fact that a major source of antagonism prevailing between ethnic/ racial groupings is often assumed to be as a result of a split in the labor market (Bauder, 2006). Furthermore, this may also be as a result of the presence of greater differentials in terms of labor pricing for similar/ associated work occupations. Consequently, the pricing of labor is often as a result of prevailing differences in terms of motives and resources often correlating with ethnicity/ racism. This is as opposed to the pricing of labor being a response to the ethnicity/ race of workforce entering the labor market. Importantly is that in most cases, the prevailing racial/ ethnic antagonism first emanates within a labor market that is split along such segmentation, traceable to existing politico-social differences. These negative effects often predate prevailing inter-group contact within the labor market. However, it is notable that specific negative outcomes i.e. exclusion, and the presence of a caste system mainly result from actions engaged in by the higher paid workforce, as well as their ‘bargaining power’ in relation to that of existing capital input (Bruce & Cheslak, 1978). In labor economics, an assumption is made that the market is perfectly competitive when it has many employers and potential employees or seller and potential buyers. Each of these persons does not make the right number that can successfully exert pressure on the market making the market a wage determiner. Here, both the employer and employer or the buyer and the seller possess information on the market conditions and there is no intervention, for instance from the government. However, these issues only act as a proxy to the real situation existing within the market. Conclusion Wage differentials ultimately negatively influence the prevailing labor market dynamics given that they ultimately influence not only efficient output, but also on profit margins accrued. While workers in a similar trade can be treated differently, based upon their placement, with such differences being implicit of the differing pay, organization, job/ work allocation and training, which results in negative enterprise building measures. Influential is the direct relation of such discrimination to the manner in which labor processes are organized i.e. in terms of education and skill-set credentials, results in un-even labor market capacity, subsequently distorting overall wage rates. Hence, of importance towards alleviating such negative effects of discrimination, is the need for availing the same employment standards to hired workforce in terms of: - minimum wages, as well as the observance of pertinent health, safety and maximum-hour laws. This is vital, regardless of the employment sector in which hired labor force belongs to. Critical is that enterprise management needs not have complete control, through provision of universally accepted employment standards. This allows employees to not only monitor pertinent standards of engagement but also their security, occupational and health safety, as well as maximum hour laws and minimum wage requirements. References Acocella, N., Giovanni D.B & Douglas, A.H. (2008). Labor market regimes and the effects of monetary policy. Journal of Macroeconomics, vol. 30: 134–56. Bauder, H. (2006). Labor Movement: How Migration Regulates Labor Markets. New York: Oxford University Press. Benjamin, D., Morley, G & Craig, R. (2002). Labour Market Economics – Wage Structures Across Markets. McGraw-Hill Higher Education. Bruce, C.J & Cheslak, J.D. (1978). Sources of Occupational Wage Differentials in a ‘Competitive’ Labour Market. Industrial Relations, vol. 33(4): 621-640. Freeman, R.B. (1997). Labour economics, The New Palgrave: A Dictionary of Economics, vol. 3: 72–76. Hacker, R.S. (2000). The Impact of International Capital Mobility on the Volatility of Labour Income. Annals of Regional Science, 34 (2): 157–172. 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