Wage Rate

You probably think about wage rates all the time, whether you realize it or not. When you pick a major, you check out the wage rates for the potential jobs, when you search for a job, wage rates are in the hot zone of the first things you look for, right?

Overly simply, a wage rate represents the amount of money a worker gets paid per unit of time. Usually it's given as an hourly or annual wage. So you might make $20 an hour, or maybe your deal with your employers pays out that dough in the form of $40,000 a year.

It could also come in other varieties. Some people make a monthly wage, or a weekly wage, or a daily wage. The point is that you earn a certain amount for a certain amount of work performed.

In shmancy economic terms, the wage rate equates to the price of labor. It's a key cost for any business. So economists look at the wage rate as a key input to production.

From a company’s perspective, it also plays into productivity. The cheaper the cost to produce something, the higher the productivity of the employee performing the work. The wage rate impacts the amount that consumers have to spend, so the wage rate plays into consumer spending in the economy as well.

Like the price for anything else, the price for labor gets determined by market forces. Supply and Demand. So the wage rate for any profession is set by the supply of people willing and able to do that job. And by the need for that job to be done.

The amount of people who can do the job represents the supply. The need for the job represents the demand.

That's why people who design advanced algorithms for offshore tax-optimized emerging market bond trading make so much money. It's a hard job. You need to go to school for a long time, and not many people can get through all the rigorous training to do it well.

Extremely low supply and demand? Well, then, sky’s the limit. Meanwhile, the pay rate for side-of-the-road windshield squeegee professionals is, well, very low. Pretty much anyone can do it, and no one is really looking to get it done.

Economists also look at wage levels on a broad scale, looking at a national or societal level. Think about the price for labor like the price for pretty much anything else. If there's a lot of labor available, prices will be low. If labor is scarce, prices will be higher.

Ok, let's look at a few historical examples. Europe, just after The Black Death.

People go months without taking a bath and, if you get out of line, you might get burned as a witch. Meanwhile, somewhere between a third to a half of the entire population just died of disease that causes a black bulb to grow on your groin.

Bottom line: thanks to the plague, there are not many workers around. Wages skyrocket. The change is so momentous that it basically undermines feudalism forever. Okay, now the opposite example.

America in the late 1800s. Immigrants are pouring in from Europe. Meanwhile, agriculture efficiencies are making farm workers less necessary, so people are moving from the country into the cities to find work. There's lots of labor available. As a result, wage rates are very low.

So low that people can barely live on them. They live in crowded tenements or company towns. A whole political movement gets created to try to make life better for these workers; lawmakers pass the minimum wage, the eight-hour workday, and other protections.

So let’s look at the demand side of the equation. Fast forward about a hundred years or so, America in the second decade of the 21st century.

Automation, computers, and robots have taken over a lot of professions. Meanwhile, cheap shipping costs and improved communications make it possible to outsource unskilled labor to overseas locations like China. There's not much demand for certain kinds of workers in the U.S., so wages don't increase, even though consumption goes up. We don't need as many American workers to produce stuff.

It’s also important to keep in mind that the way compensation takes place has changed over time. In the robber-baron days, a worker got his $0.25 for a 14-hour day, and then had to fend for himself for everything. Nowadays, most companies offer a wide range of benefits, as well as a cash salary. Health insurance, 401(k) contributions, and various other perks and add-ons. These don’t figure into wage rates, but do figure into company labor costs.

The wage rate can also be influenced by regulatory factors. The most obvious of these is the minimum wage. Remember those slums from 100 years ago? Well, in order to avoid those situations, governments will often set a minimum wage.

A business can't offer a wage below this level. As of 2020, the federal minimum wage was $7.25, but many areas have a higher threshold. For instance, Washington DC had a minimum wage of $12.50 per hour, while Washington state had a floor on its hourly wage at $11.50.

The impact of minimum wages aren't always predictable. They raise some people's overall wages above a living level. But they also encourage some businesses to turn toward automation or otherwise shrink their workforces. Meanwhile, changes in wage rates impact other economic indicators.

Specifically, higher wages can feed into inflation. As workers get paid more, companies look to make up the additional expense. They raise prices for customers, which feeds overall increases in inflation.

As a result, an overall increase in wage rates doesn't always equate to a one-to-one benefit for workers. If the higher wages lead to increased inflation, the buying power of the increased income might not be all it’s cracked up to be.

Another factor when considering a wage bonuses vs. salary. Many jobs come with a base salary, which might be nominally pretty low. But they come with commissions or bonuses based on performance.

If you’re looking to become a gold-tooth salesman, you might not get a big guaranteed salary. But the commissions might be worth it. So as you think about your career and the type of wage rates you’re looking for: Remember, it’s not the money...it’s what it can buy.