Modifications to the Supply Side

Two theories focus on understanding employee behavior: the supply side of the model. Economists describe pay as “noncompensatory.” What they mean is that job seekers have a reservation wage level below which they will not accept a job offer, no matter how attractive the other job attributes. A reservation wage may be above or below the market wage. The theory seeks to explain differences in workers’ responses to offers. Reservation levels likely exist for pay forms, too, particularly for health insurance. The theory of human capital is based on the premise that higher earnings flow to those who improve their potential productivity by investing in themselves (through additional education, training, and experience). The theory assumes that people are paid at the value of their marginal product. Improving productive abilities by investing in training will increase one’s marginal product. In general, the value of an individual’s skills and abilities is a function of the time, expense, and effort to acquire them. Consequently, jobs that require long and expensive training (engineering, physicians) should receive higher pay than jobs that require less investment (clerical work, elementary school teaching). A number of additional factors affect the supply of labor. Geographic barriers to mobility among jobs, union requirements, the degree of risk involved, and the degree of unemployment also influence labor markets. Also, nonmonetary aspects of jobs (e.g., time flexibility) may be important aspects of the return on investment.