Product differentiation is a strategy aimed to create barriers to competition. It implies the adding of value (e.g., quality, ecological or social accountability, etc.) to a product to reduce the chances that other brands and identical goods will substitute it. Similar strategies can be implemented in labor markets as well. In this case, managers will usually aim to differentiate wages.
The average level of wage in different spheres of performance is highly differentiated. Moreover, even in the same occupational field, individuals may be paid differently. It can be explained by differences in skills, education level, professional qualification, experience, job attractiveness, work environment, etc. For instance, middle-ranking employees working in a bank will usually have smaller wages than employees in chemical, automobile, and other industries associated with threats to human health. An appropriate wage should compensate for all inconveniences caused by work. Otherwise, the company will fail to increase its competitiveness in the labor market.
Such a measure as economic rent may be used to increase the attraction of talents in the context of perfect competition. Economic rent is a measure that defines the difference between the minimum price of labor and the market price. In the situation when all companies have identical job offers, when potential employees are provided with complete information about the salaries associated with work in different firms and, at the same time, are free to enter or exit the industry, employers should strive to increase the elasticity of supply, i.e., should offer wages that will exceed the average market price for a job (Keat, Young, & Erfle, 2013).
Economic rent may disappear in case all currently and previously hired employees to have similar qualifications and talents. However, when new employees differ much from the previous ones and are unique in a certain way, economic rent may be preserved for a long time. For example, long-term supply elasticity may be typical for the show business industry because famous musicians, actors, athletes, and artists have no substitutes. Due to the uniqueness of their qualities and skills, as well as the limited availability of those individuals in the market, their fees are very high. This example illustrates how the growth in demand relates to the growth of the labor price and increase in wages.
In conclusion, it is possible to say that the differentiation of wages is largely defined by the company’s investments in human capital, i.e., all activities aimed to develop employees’ qualifications and skills. Therefore, staff education increased social mobility, and so on, increase chances for individuals to receive higher payments for their work. Workers who receive relatively small wages should be provided with additional non-monetary benefits that will increase their actual revenues. For instance, the company may provide those employees with free meals, training, health coverage, etc. In this way, it will be possible to increase the attractiveness of a low-salary job. Thus, investments in human capital can be regarded as a form of differentiation in the labor market.
Reference
Keat, P., Young, P.K., & Erfle, S. (2013). Managerial economics: Economic tools for today’s decision makers. New York, NY: Pearson. Web.