Friday, May 24, 2013

Markets and Wages (6)

There are several problems with market wages that mean a righteous wage is still relevant in the modern world. Wages and salaries are often disconnected from supply and demand. Market rates can be inadequate for people to live on.

  • In every economy, a large proportion of employees are easy to replace. They often have useful skills and are doing work that is important for society, but other people can learn to do their work quite quickly, so employers can replace them if they request a better wage rate. These people cannot complete in a market, because they will always be at a disadvantage. They can often end up earning less it costs to live. The market rate will often be significantly less than a righteous wage rate.

  • When low paid employees increase their skills by undertaking training, they are often not rewarded with an increase in wages. Market pressure means that they are not compensated, despite being worth more to their employer.

  • Many employees do not have enough information to know what is the market rate for all their employees. Most will just pay what others pay. For low paid staff, they just pay the legal minimum wage.

  • Some industries are more profitable than others. People working in these profitable industries are often paid more, even if their productivity is less than those in other industries. The finance industry is a recent example. Salary rates in this industry are disconnected from productivity, and supply and demand. This shift in income share penalises people on low wage rates.

  • The price path over time for a good or service is often influenced more by the price in earlier periods than supply and demand in the current period. In labour markets, historical practice has a very strong influence on wage and salary rates. For example, economists are everywhere now (and often wrong), but they are still very well paid. Salary rates have more to do with what economic analysts were worth forty years ago, when they really were scarce.

  • Salary and wage rates are slow to respond to changes in supply and demand. When there is a glut of a highly-paid profession, salaries do not drop to the low levels as the simple market model would suggest. Salaries just stay high, because they have always been relatively high. Others wages stay low, even when there is a shortage, because they have always been low.

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