Wages

Wages Definition

Wages definition refers to assigning of monetary value for labor services. Wages are also known as the price of labor. Wages can be based on an hourly, daily, or weekly basis. In its simplest form, wages are the hourly cost to employ a certain worker.

All wages in the economy are expressed in nominal terms.

Real wages are of significant interest to economists, as the failure of employers to adjust nominal wages equally with inflation can lead to labor problems, such as shortages. That's because a fall in real wages lowers the workers' purchasing power. As a result, there is a disincentive for work. As the supply of labor declines, shortages of labor will emerge.

Today, wages are typically automatically adjusted to deduct taxes and employee contributions to employer-run retirement plans and health insurance packages. Therefore, the take-home pay, or net pay, of workers is usually somewhat lower than the gross pay (unadjusted total) that was listed for the job.

Wages Determination

Determination of wages occurs based on the interaction of demand and supply for labor.

Fig. 1 - Wage determination

Figure 1 shows the equilibrium wage, which occurs at the point where market demand and market supply intersect. At that point, the market wage is equally determined, and the quantity of labor is Qe.

Imagine for a second that employers decided to pay a wage that is below W_e (W₁). If the wage was at W₁, there would be more demand for labor than supply. As employers don't have many workers to work for them, they will increase the wage to attract the workers to come back to the labor market.

On the other hand, if the wage was above the equilibrium wage, at W₂, the supply of labor would be higher than the demand. That's because most people would supply their labor at higher wages. As the supply of labor is higher than the demand, employers can negotiate with the workers willing to work at a lower wage, bringing the wage down to the equilibrium level at W_e.

• An employee who brings in lots of revenue will be compensated accordingly, or they could easily find another employer who will offer them a wage closer to what they generate in revenue. If demand for the good or service created by a type of worker increases, the demand for that work will also increase and raise the wage rate. Conversely, if demand for the good or service decreases, demand for that work will fall, and the wage rate will decline.

The wage will deviate from the equilibrium only if there is a shift in either labor demand or supply, which results from other factors rather than the wage or quantity of labor.

Fig. 2 - Shift in demand for labor

Figure 2 shows a shift in the demand for labor to the right from D₁ to D₂ which causes the minimum wage to increase from W₁ to W₂.

Fig. 3 - Shift in supply of labor

Figure 3 shows a shift in the supply of labor from S₁ to S₂. As a result of the supply decrease, the wages increase from W₁ to W₂.

Types of Wages

Different types of wages affect the labor market and worker compensation overall.

The minimum wage is one of the main types of wages.

Compensation differences that can occur due to the difference between the minimum wage and the tipped wage are often highly controversial, with many arguing that the tipped wage should be abolished and all employees should be subject to the minimum wage.

The minimum and tipped wages also differ by state, as some states set a higher minimum wage than the federal minimum wage. Currently, thirty states and Washington, D.C., have minimum wages higher than the federal minimum wage, meaning employers in twenty states use only the federal minimum wage.⁵

It may be known as the market wage for a particular role in a specific area, such as a police officer in a large city. To be competitive, employers must be aware of the prevailing wage and set their offered compensation to a similar level.

The living wage can differ widely from place to place depending on the local cost of living and also by family size.

Frequently, the living wage is considerably higher than both the minimum and prevailing wage (market wage) in many states.

Subsistence Theory of Wages

The subsistence theory of wages says employers will pay the minimum necessary amount to attract enough workers. With an ample supply of workers, the subsistence wage can be virtually any wage chosen by the employer.

This was common in large cities during the industrial era when large influxes of immigrants and domestic migrants from rural areas meant workers had little bargaining power to force employers to raise wages.

Due to the oversupply of workers, an increase in the demand for labor does not increase the subsistence wage. It is assumed that workers are of identical skill and ability, implying simple manual labor. In cities where the supply of labor was not virtually unlimited, employers had to offer higher wages to attract sufficient workers based on the supply of labor curve.

If the supply of labor increases, the wage rate falls because employers can offer less money to attract a sufficient quantity of labor. Conversely, if the labor supply falls, the wage rate rises to attract enough workers.

If business opportunities become available, making ready workers more desirable, the labor demand increases and drives the wage rate up. On the other hand, if business opportunities are few, such as during a recession, the demand for labor falls, and the wage rate declines.

Wages vs Salary

The main difference between wages vs salary is that wage workers are paid by the hour or for each completed unit of labor, while salary workers often get a set sum spread out over an entire year.

The words 'wage' and 'salary' are often used interchangeably in everyday conversation. Even though both refer to an employee's salary, there are differences in how companies compute and arrange that pay.

The primary difference between a wage and a salary is that wages are contingent on the amount of time or effort put in by the worker. In contrast, salaries are paid out in predetermined amounts over an entire year.

The annual salary is a predetermined sum, often including paid time off for vacation and illness. Wages benefit employers in some businesses, most often those that employ workers whose schedules are more unpredictable.

While salaried employees may receive hourly extra duty pay, they are typically not paid extra money for taking more hours per week to complete their routine tasks.