The wages for a particular job are determined by the supply of and demand for workers.
The law of supply and demand states that the price (or wage) will rise when there is an increase in demand or fall when there is an increase in supply. However, when both the quantity demanded and supplied remain unchanged, prices (wages) will stay at equilibrium. The most common example of this principle is with commodities: as more people want to buy a certain good, like bananas, the price will go up because everyone wants them; but if nobody wants them anymore because they’ve become too expensive, then their price falls until someone else buys them. This same idea works with jobs – many factors can affect how much you get paid for a job, but when all of them are combined, it should leave you with a certain equilibrium wage.
So how are wages for a particular job determined?
Wages are typically determined by supply and demand for workers in an industry that pay a particular wage. If there is more demand for this type of worker than there is supply, then the wages will go up; conversely, if more people are capable of doing that job than necessary, then the wage will fall.
Several other factors can influence this equilibrium wage:
1. Location – The worker’s location relative to the workplace affects their travel costs, affecting the equilibrium wage. In a country like the U.S., living in an urban area is typically more expensive than in rural areas, so workers in those urban areas will earn higher wages to account for the cost of living. Conversely, workers in rural areas earn less because their travel costs are lower, and have relatively less housing expenses.
In addition, the location of the job affects travel costs. For example, a construction worker might work in an office building and live at home if he has a good public transportation system that makes it affordable to get him to work. Conversely, a construction worker who lives near his workplace will not have travel costs when traveling to his worksite since he will travel to his home. Because of this, a worker in the latter scenario may be able to command a higher wage than another who has significant housing expenses.
2. Skills/education – If you have more skills and/or education, you can do more things that other people cannot; conversely, if you are unskilled or uneducated, you will not do as much. In other words, if the jobs available require a lot of skills and education for workers to perform them efficiently, then most people who are willing and capable of doing those jobs will have already done so, leaving fewer workers than necessary. This lack of supply means that the equilibrium wage will drop to an acceptable rate. On the other hand, if the jobs require less skill and education to perform them, then there is likely an excess of workers capable of doing those jobs. This abundance of supply means that companies will be able to get more workers for a lower wage until the equilibrium wage has been reached once again (when
3. Worker characteristics – In labor market economics, the idea of a risk premium describes how workers tend to earn more when there are extra risks associated with their job. A good example of this would be jobs in dangerous industries that deal with hazardous materials, where workers have a higher probability of suffering an injury or death. Risk premiums can also apply to other things – if you’re applying for a job as an engineer, you can also expect to receive a higher wage if you have more education or additional certifications.
4. Company characteristics – The most important company characteristic is its size relative to the industry it operates in. There are three categories of companies: small firms (<50 employees), medium-sized firms (50-500 employees), and large firms ( >500 employees). Large companies typically pay less than small firms but more than medium-sized firms.
5. Unionization – Unions are bargaining agents that improve conditions for members by negotiating agreements with management. One of the largest effects of unions on wages is increasing the minimum wage rate through collective bargaining.
6. Economic environment –When the economy is booming, employers will typically have a greater need for workers; conversely, employers are more likely to lay off workers during a recession. These changing conditions mean that wages fluctuate somewhat. However, even in times of economic turbulence, you can expect most companies will still strive to make a profit by paying their workers less and passing the savings onto customers.
7. Expected inflation – When wages rise with expected inflation, companies have more money available to pass on to customers; when wages drop with expected inflation, prices also decrease, allowing customers to pay less.
8. Government – The government has the power to heavily impact wages through legislation and regulations (minimum wage laws, workplace safety requirements, etc.). For example, when the government creates a minimum wage law for employees in the private sector or public sector, it sets an expectation that their workers must be paid a certain wage or face fines.
Here is a good video that breaks down how salaries are determined:
What are the determinants of wages?
The main determinants of wages are how many jobs are available and how many people are willing to do those jobs at a pre-determined price. If the pay is too low, no one will accept the jobs while if the pay rises the interest rises and the equilibrium of where demand meets supply is where wage rages are set.
For certain jobs like Nursing, there is a shortage of nurses around the country so hospitals are paying upwards of $80 plus an hour to incentivize nurses to take their jobs. The standard rate for nursing wages is around $30 an hour so because the demand to take care of people that are sick is so high the pay is rising.
How are salaries determined?
Salaries are determined by the amount of demand that qualified candidates have for a particular job. If there are few jobs with high demand, the employer has leverage to lower the salary as many people will take the job in a bad job market. If the job requires a certain skill that few people have and other companies want to hire people with the same skill, the employee has negotiating power to pursue jobs that will likely overpay for their skill set.
How are wages for a particular job determined Conclusion
In conclusion, wages are determined by several factors. The most significant are the skills/education and worker characteristics of an employee and company size. Other influential factors include unions, the economic environment, and government regulations (particularly the minimum wage law).
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