Assumptions of the model include

Assumptions of the model include

· deriving income expectations from the person’s “utility function”. The supply of labour (how many offering themselves for work and for how long is determined by wages that are offered).
· Work as a “disutility”with wages being the reward/ compensation for lost leisure and subordination under a contract to an employer. Sometimes – overtime premiums are paid – but why in only some cases?
· Wages are a cost and for employers wanting to maximise profits – labour’s marginal productivity value is significant. With fixed level of capital , at some point the output of each extra unit of labour will start to fall off , so as the argument goes – the wage paid will be equal to the value of the marginal productivity of the last unit of labour. Supply and demand for labour (quantitatively and qualitatively) operate competitively through wages (pricing). At an “equilibrium point”everyone willing to work at that wage.
In reality, assumptions about free labour markets where supply, demand, price and individuals/firms interplay and compete to maximise their position – are too simple.
Individuals and employers make choices within their labour markets. Results may be interrelated and interdependent but the choices are constrained by many social and other factors – including “labour market” institutionalisation. Formal and informal rules, regulations and practice prevail over the marginal productivity of labour formula. Salamon points out that the free market wages may be constrained by:

Reservation wage Levels

Unemployment benefit and a national minimum wage fix income points below which few will be prepared to work.

Efficiency wage Levels

There is little evidence that organisations generally use a lowest wage mechanism as a regulator – indeed some may adopt a high wage strategy. A range of pay rates for a given labour market will apply rather than one price. Employers, in one way or another, survey prevailing rates for the type of work they have and the scarcity values they perceive. To secure the staff commitment, effort and talent they need, they may pay above what they regard as “the going rate”or minimum level.
Company wage and salary surveys may identify the firm’s position relative to similar jobs/rewards in rival organisations. To attract and retain the best employees an employer (finance
and competitive health permitting) may make a decision to be high in the survey league table. Of course, if the company’s financial and competitive position deteriorates, it is more difficult (institutional reasons) to reduce contracted pay other than by regulating overtime. Off-loading staff by making redundancies has costs.