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Economic theories of pay and reward


The issue of pay and prize can be said to be the most crucial part of work for individuals in the task place as they expect an incentive or payment for the work they put in. hence, employers and organizations established regular reward plans to insure that employees are paid and remain loyal with their jobs.

Pay however, has been inspired by many factors, and scholars have propounded theories to explain the reasons why wages vary, grow and fall in occupations. There can be found the monetary theory that stipulates the demand and offer factor to the variance of wages. Here, the demand for labour is a resultant aftereffect of the assistance labour can produce, and the source indicates the determination of any individual to provide labour that'll be coming in at a certain range. Here, the supply of labour whether it be low or high, creates an even of demand, that is, the higher the supply of labour, the lower the demand and vice versa, and income are determined by this amount of demand and offer as it is a cost for labour in the free market. Other ideas however have emerged with attempts to further explain versions in salary and undermine the reality and request of the monetary theory to the real world as the idea of demand and supply of labour and exactly how it affects income rates may not consider other emotional and communal factors that can also affect wages.

According to the psychologist, individuals do not only work for the money, but also for other factors that may be intrinsic motivators to them, such as the need for accomplishment and determination e. t. c, hence to the pshchologist, the view that individuals are simple rational maximizing agents offering their labour for the only real purpose of salary, is inadequate (Thorpe and Homan, 2000). On the other hand, the sociologist, dispute that variants in wages may appear due to public factors in the labour market, somewhat than only the market pushes of demand and offer.

In the reason for this article, more light shall be thrown on the financial ideas of pay and a critique of these theories will be highlighted, which also contains Wootton sociable theory of income. Also, I shall go through the reasons for inequality in pay as it pertains to gender.

The economic ideas of salary.

Income and salaries have become a matter of grave importance to the average person and the general public at large. Therefore, the economist postulates that the world is one of real acquisition and competition, which humans are determined and react to the single motive to earn a living and acquire the items money can purchase. Here, the company endeavors to buy or purchase labour for the cheapest possible rate and staff on the other side, plan to sell their labour to discover the best possible price, hence the main topic of the demand and offer of labour (Wootton, 1955)

According to the economist, income are a price of labour and in a free market is determined like all the prices by supply and demand. Here the resource and demand of human labour is equated to the source and demand of a commodity. The demand side to labour, is indicative of the demand for the goods and services labour can produce, and is also also the employers ability to buy labour at the perfect price. The source side, suggests the individuals potential and determination to react to this demand for labour at a certain price. Here, wages provide as an fascination for labour, which is the reason behind the resource and demand of labour (Wootton, 1955)

The economist also adapts itself to describe wages and salary in occupations, where wages act as a sign to allocate labour resources successfully among competing alternate employments. Here, the decrease or raises of wages indicates the lack or surplus of workers as wages go up or down to maintain equilibrium in the labour market. Here, if salary are high, personnel move to those occupations and due to the excess supply of labour, wages fall, but when there is little supply of that one needed labour, income rise to get people to those professions. Example, where technical engineers are highly needed, salary rise, but also, if designers sell their labour too high, they will continue to be unsold, exactly like in the commodity market, when goods are prized too high, they will not be sold. Therefore to the economist, when pay rise or land to a certain point, the economic factors in the labour market (demand and supply) will find a way to bring it back again to circumstances of equilibrium (Thorpe and Homan, 2000)

The economist also stipulate, that wages hinge on the marginal productivity of an employee. This is to state that income rates are equal to the marginal product of the labour power available in this market involved. Just like the marginal product of your commodity is the excess output made by one more product of an source, so is it with companies, for instance, the excess output when a firm's labour is increased by yet another unit, can determine its wages.

Here also, the marginal net product of any employee is the difference made in the total end result of an industry when the employees labour is withdrawn. The output can be trained by the physical result of product created by an employee. This is also the financial value (That is the value of an employee produced from his ability to create income).

Therefore, the income rates being equal to the marginal product of a worker, stipulates a worker gets wages that are add up to the efforts placed into the labour process, quite simply, in a completely competitive market, people tend to escape the development process just about what they devote. here, the demand and salary for labour will be dependent on the marginal productivity of the employee, that is what the worker can put into the labour process, hence employers who seek to increase income will thus demand for labour at the worthiness of when the increment of end result equals the value of the additional labour cost (Bowles et al. , 2005; Wootton, 1955).

Further still, another economical theory that will try to explain the explanation behind income in the labour market have come up with the resource side method of wage problems. This is inlayed in the individual capital theory. Wages have recently been dependant on the scope to which a worker puts in effort, depicting the marginal efficiency theory or the amount of demand in the labour market, But here, it is observed that the quality and not the amount of labour insight has marked effects on efficiency, hence, pay. The individuals capital theory therefore emerged as a trend that features and talks about the modifications of wages with regards to the fact that more informed workers will be more valuable to employers than less informed employees (Rueda and Pontusson 2000). Here, income vary resulting from a reflection of the amount of assets people put in themselves through trainings and education, e. t. c. In cases like this, these opportunities in human capital have a tendency to attract staff to employers who will pay higher pay to obtain it (Thorpe and Homan, 2000).

Although these ideas have had large effects on the reason and methods to wage problems, they have been criticized as most times, it isn't clear how these theories may be relevant to real life situations.

Critisism of the economic theories and recommendations by wootton.

Irrespective to the fact that the economic theories of salary have gained identification, it has presently come under questioning and criticism. The marginal productivity theory has been considered to be unrealistic because employers may not be able to assess labour in terms of marginal income. How will an company understand how much input a specific worker places in, in relation to the overall output?

Again, the economical theory has been criticized because of its incapability to concretely explain the flaws in the labour market or its occurrences in real world configurations. In organizations, pay can be improved above the market rate in other to enhance organizational performance or keep important employees. Here personnel are encouraged to work harder and start can also be reduced when salary are high, as the company may loose cure workers that are important and have large experience from the business, hence income don't just fluctuate due to provide and demand, but also by the discretion and determination of employers in an organization. Hence, these cultural forces, exterior factors or noises in the labour market, also act as determinant of wages (Thorpe and Homan 2000).

Another major critique of the financial theory of pay is Barbra wootton, she seen rewards and pay from the public perspective and criticized the economical theories of pay and delves in to the more realistic reason of pay as it pertains to real life setting. She therefore, has rejected the thin abstraction of mainstream economics as a procedure for the wage problems that really exist such as conflicts in the labour market, discrimination, or working conditions, e. t. c. Here, she reached out for the interpersonal foundation to pay because she cannot explain why prices proceeded to go up, when quality provided went down and vice versa. For Wootton, income determination was a special circumstance of human behavior and may be investigated by watching and requesting people what they do rather than a special case to be deduced from the general theory of value (Dimand and Hardeen, 2003).

Wootton suggests that as social pushes determine income rates and not the rule of demand and offer, there should be a link between abstract theory and its own concrete application to the real world, hence, she proposes that wages are fixed by the individuals in the contemporary society as they arrange for income for reasons of ethicality. She envisages that for pay to be established, individuals should comprehend the interpersonal situations and developments that exist, properly examine the markets to learn the issues that can occur and strategically plan to combat these problems.

In woottons analysis of the ministry of labour data on profits (Dimand and Hardeen, 2003), she became aware that the info she found was insufficient to establish or disprove any standard theory of pay, however, she still issues the traditional theories of pay as she stipulates that institutional plans and mental health motivations affect wages. Here, classifications of jobs and hierarchy derive from social factors rather than economic things to consider (Dark brown, 1955).

As the economic theory creates no differentiation of income and seem to portray an unrealistic world of equality in all occupations, and this occupation can be obstructed only by issues of flexibility and accessibility, wootton criticizes it and posits that there are differences in wages and this income differentials mattered greatly to personnel, and that they therefore try to rationally resist reducing wages by discussions or threats of strike. These are corresponding rational behaviors that influence income. She therefore connots that trade unions act as a make for the regulation of pay. Here, employees may be able to affect the increase of wages through collective bargaining as their trade unions make an effort to get yourself a markup of the present income rates, thereby attracting even more customers to them.

Trade unions have been seen to adopt the monopolistic methodology towards income rates because they are responsible for the dissemination and selling of labour, however, they are also aware of the fact that there is a point of equilibrium were the demand and supply of labour will balance. They may then decide to either sell small items of labour at high prices or a huge amount of labour for lower prices and decide on the most profitable reason behind action. However, the trade unionist is aware of that if wages are brought up above a certain amount, unemployment will increase no matter how strong the trade union is. However, as trade unions may demand for high wages from employers, they might not demand that their workers be taking but to ensure wages are optimal, they may threaten to go on strike and the employer, income are better paid as the price tag on the stoppage of work may be higher. In any case, the economist suggests that, the idea of the curve at which the employer and trade unions agree, being the point of intersection, reveals the highest income trade unions can acknowledge from employers. (Professor hicks, 1932) cited in Wootton 1955 however proposes that the utilization of discussions and collective bargaining to regulate wages is alone self applied defeating, as the marginal efficiency wage distribution will always prevail (Wootton, 1955)

Having evaluated the economic ideas of pay, and it criticisms, we can also note that different occurrences total wage gaps not just demand and supply. Here, I am considering the income spaces that results from Gender inequality and dissimilarities in income that result from culture.

Variatioins in income as it relates to gender and culture.

The economical theory, views all individuals in the labour market as one, with no distinctions of gender, with regards to wages. However, taking into consideration the way to obtain labour in the labour market, there have been spaces and differentials in pay of women weighed against men. The persistence of the gender pay difference and the resultant disparity between men's and women's income has become a concern of concern. When the average person incomes of men and women and compered, the difference is alarming. The office of national statistics remember that although pay difference has become large over the years, it is narrowing down in 2008 and 2009. It includes decreased to 22% from 22. 5% in 2008, nonetheless it still exist. The entire disparity has still remained 16. 4%. the consequence of this inequality for the reason that women will be poorer than men (TUC 2008)

However, as steps are being taking to reduce this inequality, Rubery et al. , (2005) observed that significant income gaps in europe has taken about policies that will assist up close the gender difference as there are primary factors that cause wage gaps, such as occupational and sectoral segregation, education and training, job classifications and pay systems, e. t. c. however, it has been noted that employers often make rational decisions to hire women at lower wages than men for the same observable level of productivity and despite women's contribution in education and job patterns, there's been an un-adjustable pay distance between women and men because so many times, the feminine involvement in the labour push promotes wage inequality by increasing the comparative supply of unskilled labour (Rueda and Pontusson, 2000). Research in addition has noted that their are present a high level of discrimination in relation to the recruitment and placement of women in the labour make, resulting in income distance differentials. Women are regularly located down the occupational hierarchy, regardless of the fact that they are as trained as their male counterparts. Hence, opportunities in women through education and training, will not specifically help close gap differentials or make income higher for females as envisaged by the real human capital theory. Women have been segregated against, as they have been stereotypically looked at to belong to certain occupations that simply pay less, such as teaching, social care, part time jobs and none of them regular jobs and they are viewed as individuals with less education and less experience than men. This is a resultant effect of increased income inequality. However, the mainstream theory argues that gender inequality can be reduced if the pay space is altered for the dissimilarities in the characteristics of the individual, such as education, training and experience, and not the gender (Rubery et al. , 2005).

Similarly, conversations have been put forward to note the prevailing differentials in wages and pay spaces as it relates to cultures. Here, different cultural factors may impinge on issues of pay and reward preferences, that is the types of pay, systems and requirements for pay. Although most pay systems have mainly been framed in conditions of developed economies and a full convergence of management practices such as incentive could be exported anywhere and have similar effects, culture works as a divergent pressure as reward practices in particular are highly vunerable to its impact.

Rewards and pay, stand for the main means where organizations attract, maintain and sustain desired labor force behaviors, employers therefore have to consider factors in the environment as employee preferences which rewards try to satisfy are notably formed by unique ethnic settings. That is why professionals in multinational companies may be confronted with the hard question of what reward is useful and preferred by the web host country nationals as the task should go beyond just the look or composition of incentive system to the praise preferences of individuals across edges. Rewards however may well not just be limited by financial payment as different civilizations may vary in alternatives (Chiang and Delivery, 2007).


As pay and pay back is a primary issue of matter for folks, employers and the public, theories of pay and incentive have erupted as an approach to wage problems. The general economic ideas of pay have equated the investing of labour compared to that of the item market, as demand and supply of labour become a means of wage versions and pay, which is the price of labour. However, public and psychological theories have criticized the financial ideas, stipulating that other interpersonal factors apart from market factors of demand and supply, become a make in the legislation of salary. These interpersonal factors, such as trade unions, culture, gender, companies and so on, have therefore thrown more light on why wages differ. However, financial as well as public factors, have glaring effects on wages and even though the financial theory might not give explanations for disparity in pay, they are helpful in highlighting the determinants of salary.

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  • Bowles Samuel, Edwards Richard, Roosevelt Frant (2005) understanding capitalism.
  • Chiang, F. T and Birtch, T. A. (2007) the transferability of management practices: analyzing cross-national variations in rewrds personal preferences, human relationships Vol. 60, pp1293-1331
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  • Dimand Robert W. and Hardeen Indra (2003) Barbara Wootten's Lament for Economics and Vision of a Public Economics.
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  • Wootton, B. (1955) the public foundations of wage insurance policy London George allen and Unwin-Chapter 1 the economist theory of salary.
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