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Thread: Wage Determination

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    Wage Determination

    Right wing schools of thought typically have a rather backward understanding of the labour market. Indeed, when the orthodox attempt to explain empirical phenomena they are typically forced to adopt heterodox concepts (see, for example, the common ground with Marxism over 'efficiency wages').

    In your opinion, what determines wages? If supply & demand is indeed relevant, why does involuntary unemployment exist?

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    Industry is no longer domestic. To compete globally especially in production where in many cases your labor costs are by far the greatest cost of production, you need to be competitive.

    Considering there are various labor models globally and various classes of labor force, having a sort of fixed or forced wage system puts manufacturers at a competitive disadvantage.

    See the US auto industry, they will never be able to maintain global competitiveness because of their artificially inflated wage structure.
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    Quote Originally Posted by Captain Obvious View Post
    Industry is no longer domestic. To compete globally especially in production where in many cases your labor costs are by far the greatest cost of production, you need to be competitive.
    But that isn't enough to understand wages. We can certainly refer to trade effects (with skilled labour actually likely to see real wage gains but, due to comparative advantage, low skilled labour leading to wage reduction). However, we do not see wage equivalisation (which you'd expect if we took a basic trade approach to wages). Germany, for example, secures much lower working poverty rates than the likes of the UK and the US.

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    Quote Originally Posted by Leveller View Post
    But that isn't enough to understand wages. We can certainly refer to trade effects (with skilled labour actually likely to see real wage gains but, due to comparative advantage, low skilled labour leading to wage reduction). However, we do not see wage equivalisation (which you'd expect if we took a basic trade approach to wages). Germany, for example, secures much lower working poverty rates than the likes of the UK and the US.
    Why?

    I hear Germany referenced in this respect a lot but never get a clear answer as to why.

    Economies are a complicated whack-a-mole game, when something is up, something else is down.

    What does Germany do that makes it an enigma?
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    Quote Originally Posted by Leveller View Post
    In your opinion, what determines wages? If supply & demand is indeed relevant, why does involuntary unemployment exist?
    Welcome Leveller

    Just taking a stab at it but maybe because supply (the work force) exceeds demand (available jobs)?

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    Quote Originally Posted by Leveller View Post
    Right wing schools of thought typically have a rather backward understanding of the labour market. Indeed, when the orthodox attempt to explain empirical phenomena they are typically forced to adopt heterodox concepts (see, for example, the common ground with Marxism over 'efficiency wages').

    In your opinion, what determines wages? If supply & demand is indeed relevant, why does involuntary unemployment exist?
    It's going to sound like a cop out but I think it just kind of depends, and I don't think there is a true way to fairly determine a wage. For example logically a doctor is probably going to make more money than like a janitor would because of the extra responsibility a doctor has when it comes to help saving lives and also the additional education, but with that being said both the doctor and the janitors jobs are vital in their own way and who is to say that the janitor couldn't have had that same opportunity as the doctor if his or her situation were different growing up and finishing grade school? I think the more that wages are polarized and the more that wages vary across the board ultimately it will lead to an even greater divide. I think our goal should be bringing more people together and in a more equal way than increasing the competition and gap between the haves and the have nots. My parents would probably look at me like I am an alien if they heard me say this but should a doctor make a six figure salary and a janitor barely make a five? I don't know, a big part of me says no.

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    What determines wages is not abstract formulations. Those may be descriptive in a general way of what happens, but, if they lay any claim to being scientific, they are not prescriptive. Regardless, their abstract nature divoces them from the very real people.

    What determines wages is simple: What the market will bear, a phrase used for the myriad subjective valuations made by individuals as employers and employees as to what they hope to gain out of the social contract. Right now where I am there's a great demand for what I do, companies are willing to pay more and I can ask for more. Just a year ago the reverse was the case, the supply of those who can do my work was too high and going salaries were low. Not only does this vary across time but also across space as the next city up the road may have the opposite situation.

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    Quote Originally Posted by Captain Obvious View Post
    I hear Germany referenced in this respect a lot but never get a clear answer as to why.
    In terms of trade, exporting is more important to them (i.e. it represents a greater % of overall GDP). That they have higher wages than countries where trade is relatively less important is interesting in itself. It certainly isn't supportive of the view that trade must depress wages.

    What does Germany do that makes it an enigma?
    I wouldn't know. I don't know enough about their economy. All I know is that their wage determination doesn't help any trade explanation for wage trends (that and how their minimum wage has been linked to collective bargaining, rather than the 'national rate' typically chosen by the government)

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    Quote Originally Posted by Chris View Post
    Right now where I am there's a great demand for what I do, companies are willing to pay more and I can ask for more. Just a year ago the reverse was the case, the supply of those who can do my work was too high and going salaries were low.
    We know that supply & demand cannot understand the labour market. Marginal revenue product of labour (determined by the marginal physical product and the price of the product) doesn't explain the existing wage differentials

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    Quote Originally Posted by Chloe View Post
    It's going to sound like a cop out but I think it just kind of depends, and I don't think there is a true way to fairly determine a wage. For example logically a doctor is probably going to make more money than like a janitor would because of the extra responsibility a doctor has when it comes to help saving lives and also the additional education, but with that being said both the doctor and the janitors jobs are vital in their own way and who is to say that the janitor couldn't have had that same opportunity as the doctor if his or her situation were different growing up and finishing grade school? I think the more that wages are polarized and the more that wages vary across the board ultimately it will lead to an even greater divide. I think our goal should be bringing more people together and in a more equal way than increasing the competition and gap between the haves and the have nots. My parents would probably look at me like I am an alien if they heard me say this but should a doctor make a six figure salary and a janitor barely make a five? I don't know, a big part of me says no.
    And if you had to have surgery tomorrow, who would you rather have do it? The doctor. Why? Because, I venture to guess, you value his services. And it is this valuation among millions that determines wages.

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