How Are Wages Determined in the U.S.?

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The question of how wages are determined in the U.S is a pertinent one for the work force, employers, government organizations and other stakeholders in the marketplace. Wage earners as well as employers want to know the factors involved in deciding wages; and governments and academic institutions seek such information to make policy decisions and recommendations. Economists and other academics have long debated an overall framework that could explain how wages are determined in the U.S., but there has been no overall consensus. To understand the different takes on the wage-determination issue, we need to look at the topic from various angles.

Supply-Demand

  • The supply-demand model applies to the competitive labor market in the U.S. The supply side is the number of people who are willing and are able to do a certain job, lawn care, for example. The demand side is the number of such jobs available. If the supply of workers for a certain skilled job is limited and the demand for workers is greater, then the wages for that job will be higher than a job with a large supply of workers and few positions available. The same logic also applies to changes in wages over time. An increase in supply or a decrease in demand for a certain job can cause the wages to lower or rise competitively.

Specific Factors

  • If we take the same analysis to a micro level, focusing on individuals or small groups, some specific factors that play a significant role in determining wages can be identified. Factors such as an individual's skill sets, experience, education and whether he is a member of a labor union can be taken into account. Also, the demographics of the region and the industry classification play a part in wage determination in the U.S. Using these factors, wage differences can also be determined by dissimilar attributes, such as workers with and without college education or workers in a metropolitan city versus a small town.

Employer's Role

  • In a significant number of markets in the U.S., employers play a major role in determining wages. In most cases, they do not allow the supply-demand model and employee attributes to influence wages. Nor does it matter if the industries and job titles are similar. For example, engineers with the same backgrounds are paid differently by Google and Microsoft. In addition, national companies with sites in different states pay different wages to workers with the same job description.

Minimum Wage

  • Minimum wage plays a role in determining pay for jobs that would pay too low in a normal supply-demand model. In the U.S, the minimum wage was initially set at a level that could ensure the survival of the lowest-paid unskilled workers, and it has been adjusted regularly to reflect inflation. Some states have set minimum wages different than the federal level to reflect the local cost of living. For example, California has its minimum-wage bar set higher than the federal government's.

Government Contracts

  • Wages in a government contract, involving public buildings or public works projects, are established using the Davis-Bacon act. The act stipulates a minimum level that needs to be paid to different classes of workers. This is done by determining general wages by geographical location and the type of project as well as wages for specific projects in accordance with the contractor's specifications. In these scenarios, the government is directly involved in determining the wages of part of the work force. This federal act has been repealed in 18 states and is applied at varied thresholds in others.

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