By contrast, the self-employed do not receive wages, but sell directly their labour in the market. The property and enterprise owners obtain income from rents, dividends, and other financial instruments' gains. The unemployed in certain countries and under constraints receive public financial support.
In another perspective, wages are a major determinant of production costs.
of the wage may be paid in nature (e.g. fringe benefits), but the core
is usually paid with money. Some firms
use "stock options" as part of the remuneration package.
A part of firms' labour cost is given to the State in terms of taxes and contributions to social funds for retirement and unemployment. Thus, in many countries there exists a large discrepancy between gross and net wages.
In public bodies, laws and negotiations decide wages. A government wanting to cut public expenditure might try to freeze or reduce public wages, whereas a stimulus-oriented policy might include increases.
and organizations pay wages to employees usually depending on working
time and/or on results (production made or objectives reached). Individual
wage often depends on occupied position in the organization as well as
on education, cumulated experience and seniority. Wages for the same job
outside the firm may serve as a (conventional or mandatory) reference
point in wage-setting routines.
differentiation is a widespread phenomenon: different occupations and
different industries pay working time at uneven rates. Even wage segregation
is common: certain jobs are "socially" attributed to a certain
gender or ethnicity, which in turn might strive to widen the jobs it is
"allowed" to perform.
Wage structure for occupations, industries and regions is subject to very slow long-term change. Imitation of wage increase in other parts of the country is a common force in action.
rates for the same position can be different between "normal hours"
(e.g. 40 hours a week) and overtime, i.e. the hours exceeding regular
working hours. Usually overtime are paid better, as it occurs when the
work is performed during the night or festivities (e.g. Sundays). A part
of the remunaration can be linked to results, both on an individual and
collective term of reference.
are changed at discrete intervals of time, often a year, possibly within
a multi-year perspective plan.
dynamics are linked to the following main determinants:
The legal framework about industrial relations, including the right to strike and its possible limitations, the type of trade union allowed or historically prevailing, the number of working hours and (effective or ineffective) limitations to child labour is very important for actual results in negotiations. Legal requirements, like minimum wages, are important in many countries.
This in turn make the electoral process very important for wages, with trade associations and trade unions (and their respective constituencies) spending and organizing support to candidates in exchange for favourable laws.
For certain jobs, international levels of wages and immigration may be additional determinants, with a large pool of emigrants exerting downward pressure on current domestic wages, on the one hand, and being the source of international remittances, on the other.
More analytically, a firm's labour market can be purposefully separated in internal market (within firm) and external market (in other firms and the unemployed). Internal market is ruled by hierarchy (with different layers of workers, some being at the fringe and other at the core of the firm, with all degrees of low, middle and management strata) and put in motion with career processes, together with firm-specific wage policy. To a certain degree, external conditions exert only a marginal role in internal negotiations. In fact, employees have cumulated firm-specific skills, difficult to find ready on the market. Seamless effective work requires mutual trust, which in turn depends on stability of work for, at least, a core of employees.
By contrast, external market is relevant when employees choose a voluntary dismiss for getting better conditions outside. When a relevant turnover takes place, the management is possibly forced to choose another wage policy.
may be characterised by a much lower wage expectations than the employees
and they are prone to more flexible working conditions, but they lack
competence and are often characterised by lower productivity.
This analysis explains on the one hand, why a higher unemployment may brake wages but also, on the other hand, why wages can grow even if there exists unemployment.
Higher wages mean higher income in most families; thus their consumption will usually grow as well.
consumption will depend on consumption attitudes
of the other families, in particular of whose income heavily relies on
dividends. Immigrants may save part of their
income to send remittances home.
total consumption grow, this will boost sales throughout the industries,
increasing productivity. This, in turn, is conducive
to a further growth in wages.
the Keynesian multiplier, income increase will be followed again by consumption,
giving rise to a positive feedback loop.
If sales do not increase enough and the share of labour costs on total costs is large, which is not always the case, the increase in wages will be reflected in an increase of labour cost per unit of output. This, however, if the final markets are not very competitive, brings forth a very credible risk of inflation, with the involved reduction of real income. A wages-prices spiral will begin, with only nominal increase of both, keeping real things to a large extent untouched (but provoking a lot of social conflict).
Increases in nominal wages will boost payroll tax revenue, thus, other things equal, they will reduce public deficit.
On a more micro level, it is important to remember that wage level and dynamics are a key feature for individual motivation to work.
Since GDP and work productivity have an upward trend as a general rule, one could imaging the same for real hourly wages. Instead, many countries experience a long-run stagnation if not even a fall, due to persistent weak organised labour, uncapable of finding effective ways to attract and mobilize workers, especially in small and medium-sized enterprises.
dynamics might be hidden to the personal experience mostly because, during
the work life, there is a progressive increase of competence, possibly
accompanied by changes in the workplace, so that, individually, one sees
his own wage rise.
In certain countries, wage increase are concentrated in periods during which they sharply rise.
Still, it is quite intuitive that a situation of full employment, healthy firm performances and good perspectives will tend to raise wages. Recession, with its gloomy perspectives for labour will tend to brake wage dynamics.
Even before nominal wages are adjusted to the labour market conditions, recession usually shrink working hours, and especially overtime. This quite automatically reduces workers' income and the weighted average of wage rates.
If recession goes further, some firms will fire people. The sequence in which fringe and core workers are fired will move the average wage rate in that industry. If fringe workers are fired before the core, then this tend to rise the average rate. Some core worker can however receive part of their wages as bonuses from the economic conditions of the firm: this component will usually go down or disappear as the latter deteriorates.
falling nominal wages are powerful depressors of labour commitment and
productivity; they put a pressure on workers to leave the firm looking
for a better one, or even to emigrate if the situation is too bad in the
whole domestic economy.
In short, wages are moderately pro-cyclical. If labour is weak, recovery periods may only unevenly impact wages. If, on the contrary, labour is strong, higher productivity and profits and will be reflected in higher wages. This may spread expansionary forces and allow the system to enter in a booming phase. In this moment, an increase in minimum wages is very effective in raising domestic demand (and tax revenue) without inflationary pressures, as there is still room in the production capacity and investments ramp up to widen it.
wage rates will go up as the expansion continues, since overtime become
more common (and they are better paid), to give place to employment increases
as the firm is sure that there will be demand for its products for the
foreseeable future (or at least the duration of the work contract).
wage pressures are too strong, inflation
may rise. In a context lacking different instruments, the central bank
may decide to adopt a restrictive monetary policy, possibly with a "soft
landing" idea in mind. "Hard landing" is a distinctive
possible outcome, instead, with its recessionary developments.
sources (profits, labour) by income level of household (2012)