The Theory of Wage Rates 2

Why Different Workers Are Paid Different Wages

In the creation of wage rates, the market supply of workers of a particular kind can be thought of as pools of unemployed workers trained for that occupation. The market demand for workers of each occupation is the total quantity of workers of that kind that businessmen want to hire (in the relevant geographical area over some time period.)

For example, the market demand for chemical engineers consists of the employment vacancies that businessmen need chemical engineers to fill. These vacancies, in turn, reflect the profitability of the businesses that use chemical engineers. An increase in the rate of profit on products whose production requires chemical engineers leads investors to expand their investments in such businesses, expanding the businesses and the demand for chemical engineers.

Employment vacancies for chemical engineers are also affected by the demand for the products they help to produce. If the demand increases for goods produced by chemical engineers, then the businessmen producing those goods will want to hire more chemical engineers.

The demand for chemical engineers also reflects the availability of alternatives or substitutes which can do the same work in a business as chemical engineers. Substitutes might include men trained in another field who can replace chemical engineers; or machinery, tools, or equipment that can do same work as the chemical engineers. The demand for chemical engineers increases if the prices of substitute factors increase or if the availability of substitute factors decreases.

Or, consider the demand for employees in retail stores: If a type of retail store enjoys an increased rate of profit, retailers in that line will want more inventory in order to expand their stores or open more stores, both of which will require more employees of many different kinds. For example, an increase in demand for electronics products will increase the rate of profit on electronics stores, motivating businessmen to expand existing stores and open more stores, requiring more salesmen, clerks, managers, and cashiers.

Decreases in demand for a specific kind of worker are the result of the opposite of the above causes. A decrease in the demand for accountants would take the form of a decrease in employment vacancies for accountants. This might be caused by a decrease in the profitability of businesses hiring accountants, or the invention of a computer program that can replace accountants, or an increase in the number of substitutes for accountants, or an improvement in the quality of the substitutes. As a result of any of these, businessmen would want to hire fewer accountants.

This overview of the factors affecting the demand for employees is not intended to be exhaustive.

Now we have a clear understanding of the meaning of supply and demand in worker markets. Next time we will see how supply and demand interact to create wage rates.