The Traditional Theory of Wage Determination

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Using Graphs The market forces of supply and demand explain the equilibrium wage rate for the traditional theory of wage determination. How does this theory differ from the theory of negotiated wages?




Figure 8.6


Median Weekly Earnings by Occupation and Union Affiliation


Represented by Unions

Nonunion Workers

Managerial and Professional Specialty



Precision Production, Craft and Repair



Government Workers



Technical, Sales, and Administrative Support



Operators, Fabricators, and Laborers



Farming, Forestry, and Fishing



Source: Bureau of Labor Statistics, 1999

Using Tables Weekly earnings are significantly higher for highly skilled occupations. Workers represented by unions also make substantially more than their nonunion counterparts. What can you infer about the theory of negotiated wages from Figure 8.6?

higher the average wage rate. Semiskilled workers generally receive more than unskilled workers, and skilled workers receive more than semiskilled or unskilled workers. Professional workers generally earn more than any of the other grades. This relationship is evident in Figure 8.6, which ranks occupations in descending order according to the level of skills and training required.

At times, exceptions to the traditional theory may appear to exist. Some unproductive workers may receive high wages because of family ties or political influence. Other highly skilled workers may receive low wages because of discrimination based on their race or gender. In addition, workers and employers do not always know what the market wage rate is or should be.

Theory of Negotiated Wages

Sometimes other theories are useful when explaining wage differentials. The theory of negotiated wages states that organized labor's bargaining strength is a factor that helps determines wages. A strong union, for example, may have the power to force higher wages on some firms.

Figure 8.6 helps validate the theory of negotiated wages. The table shows that when workers are either unionized or represented by unions, weekly salaries are significantly higher than for nonunion workers. This situation applies to all occupations except for the "managerial and professional specialty" category, whose members are seldom unionized.

A final factor important to unions and collective bargaining is seniority—the length of time a person has been on the job. Because of their seniority, some workers receive higher wages than others who perform similar tasks.

Signaling Theory

The last explanation is known as signaling theory. This theory states that employers are willing to pay more for people with certificates, diplomas, degrees, and other indicators or "signals" of superior ability. For example, a sales firm might prefer to hire—or be willing to pay more for—a college graduate with a major in modern dance and a minor in theatre, than a high school graduate who excelled in business courses.

While this may seem odd at first, some firms view the college degree as a signal that the individual possesses the intelligence, perseverance, and maturity to succeed in his or her endeavors.

You might hear from friends and acquaintances that they did not need their high school or college degree to do the job they currently have—as if their education was unimportant. What these people overlook is signaling theory—the theory that helps explain why they got the job in the first place. The theory says nothing about what they needed to know to actually perform the job once they got it.



Regional Wage Differences

Regardless of how wage rates are determined, they can still be different for the same job from one part of the country to another. Labor mobility, cost of living differences, and attractiveness of location can all make a difference.

Skilled workers often are scarce in some parts of the country and abundant in others, causing differences in wage rates. These differences, however, can be minimized by labor mobility-the ability and willingness of workers to relocate in markets where wages are higher.

Not all workers are equally mobile. Some are reluctant to move away from relatives. Some may want to move, but find that the cost is too high. Others do not want the inconvenience of buying a new house or renting a new apartment. As a result, the demand for certain skills remains high in some areas and low in others, and so wages tend to vary.

Another factor that affects wages is the cost of living. In many southern states, fresh fruits and vegetables are readily available. In addition, little money is spent on heavy clothing or on heating a home. In Alaska, however, food must be shipped in from thousands of miles away, people must have warm clothing, and every home must be well heated. Because the cost of living is higher in Alaska than in southern states, employers tend to offer higher wages in Alaska.

Finally, location can also make a difference because some places are thought to be so attractive that lower wages can be offered there. A person who likes to hunt and fish may be willing to work for less pay in Colorado or Montana than in New York City. Others may want to flee the busy-and expensive-city life for life in the country.

Pismo Techniczne
Section 3 Assessment

Checking for Understanding

1. Main Idea Using your notes from the graphic organizer activity on page 205, explain why wage rates differ among regions.

2. Key Terms Define unskilled labor, semiskilled labor, skilled labor, professional labor, non-competing labor grades, wage rate, traditional theory of wage determination, equilibrium wage rate, theory of negotiated wages, seniority, signaling theory, labor mobility.

3. List the four categories of labor.

4. Explain the importance of noncompeting labor grades.

5. Describe three different approaches to wage determination.

Applying Economic Concepts 6. Signaling Theory Look at some help-wanted ads in your local paper. What criteria do they often specify, and how do these criteria relate to signaling theory?

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7. Making Comparisons How does the category of semiskilled labor differ from unskilled labor?

8. Making Generalizations If you were a semiskilled worker, what could you do to move into a higher category of noncompeting labor?

Practice and assess key social studies skills with the Glencoe Skillbuilder Interactive Workbook, Level 2.


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  • esmeralda
    What is an exception to the traditional theory of wage determination?
    5 years ago
  • valeria
    How does signaling theory explain differences in wage rates?
    4 years ago
  • Asmara
    What can you infer about the theory of negotiated wages?
    3 years ago
  • furuta
    What are the three different approaches to wage determination?
    1 year ago
  • feorie
    What are theories of wage determination?
    1 month ago

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