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FKD 101

FKD 101: What Are Wages?

Wages aren’t only dictating how much cash you get at the end of the week; they’re also responsible for the balance of the labor market.

Wages: A broad view

Wages are determined by market forces. That’s right, we’re talking about our good friends supply and demand. In the context of wages, these two become labor supply and labor demand. The relationship between these two controls the number of hours employees are willing to work and the compensation they will receive in exchange (wages and benefits).

If you remember our discussion on supply and demand, price was how we were able to reconcile the two economic forces. The great news is that wages, labor supply and labor demand work essentially the same way.

Labor supply

You can think of labor supply as the number of hours that workers are willing to put in at a certain job each day for a given wage. In other words, they enter the labor market, decide how much they’re willing to work for a particular employer and “supply” labor.

[postquote]

Why would anyone want to supply labor? Wages. Wages are what allow people to pay their rent, buy that car, save for retirement, take that vacation to Guam, etc. Basically, wages are how people trade their labor for a medium of exchange that allows them to live their lives.

Beyond simple hourly pay or salary, there are a few factors that can affect how much time workers are willing to spend on the job, with the simplest one being wages. These include:

  • Overtime pay
  • Intangible benefits (opportunities for personal improvement, such as employee-sponsored education)
  • Tangible benefits (your 401(k) and other retirement savings, healthcare, etc.)

Job security can also be a central factor, depending on if the person is looking for a full career, a part-time supplemental job or even just a summer gig to earn some quick cash.

Labor demand

On the other hand, labor demand is how many workers the market is willing and able to employ at a given time.

While this demand is reflected in the wage that firms are willing to pay their employees, the overall labor demand is a result of a firm’s production goals, the costs of production and the market for particular goods and services. A company will hire, and fire, workers until it reaches its efficient level of output.

Let’s put it all together

Now that we have a basis of labor supply and labor demand, let’s bring it back to how wages can alter the two.

If demand for labor increases faster than the supply, then the workers, say tech coders, have the upper hand in terms of negotiations. The workers will be able to command higher wages and better compensation (healthcare, benefits, job security, etc.), because of the scarcity of labor supply relative to demand.

Once labor supply starts to increase, companies don’t have to compete as hard for those workers, thus allowing them to start offering lower wages.

Skilled vs. Unskilled Labor

While it’s great to know what happens to the market when wages fluctuate, did you ever ask yourself why certain jobs pay more than others?

Let’s compare a rocket scientist and a Starbucks barista. Two vastly different jobs requiring vastly different skillsets. So why do these two occupations make completely different salaries?

For the rocket scientist, you need to go to college and earn a handful of degrees to be considered “qualified” for the job. Oh, yeah, and you also have to be a genius. With a rocket scientist, finding the right worker is crazy difficult because the person’s brain needs to be wired to a rare skillset in order to rescue Matt Damon (again).

It doesn’t take a rocket scientist to see that you, me or anyone else would be capable of being a barista because all of the training would be done on the job. We would just be expounding on our already existing skills, like customer service, efficiency, memorization, etc.

Despite your preferences between pouring lattes or building rockets, everyone can agree that a discussion on wages can make us more knowledgeable about the functioning of our labor market, regardless of your profession.

 

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