Wages, defined as reward for labor input, continues to play a critical function in all modern economies, especially so by facilitating the allocation of labor to their most productive uses. In this regard, an optimal wage rate is cardinal not only for labor market stability but also for maximizing welfare across the economy.
From workers’ perspective, wages are seen as sources of livelihood and indicators of social status for themselves and their families. On the part of employers, wages influence viability and profitability of investment, and serve as a source of attraction and retention of qualified workers. From the perspective of government, wages are seen as a tool to maximize the citizens’ welfare.
Therefore, the process and outcome of wage determination must claim keen attentions, given that they have significant effects on critical economic variables such as unemployment, income, welfare, among others. For developing countries such as Liberia, where the government is the largest employer, public sector wages are critical to government because of their implications for the national budget; negative fallouts of any wage negotiation within the public may have worsening effects on growth and national security.
Wage Setting Models
“Why different jobs pay different wages or why similar jobs in different locations are paid differently?” Answers to these questions are provided by different wage setting models. In the Neoclassical framework in which wages are set by the market forces, wage differences between occupations, firms, locations, etc exists only in the short-run; and that all wage differences are expected to be eliminated in the long run.
This arises through the movement of labor from low to high wage areas, thereby altering demand and supply of labor until all wages are equal. The Neoclassical model however fails to explain why different wages paid by different firms for similar type of work because it is built on simplified assumption that: there is perfect competition in the Labor market; which is difficult to hold in practice. Institutional models such as the efficiency wage theory, compensating wage differentials, insider-outsider relations, and trade unionism provide answers the question posed.
The Efficiency wage argues that rational firms may pay wages above the subsistence level to generate worker efficiency based on the following reasons:
Higher wages raise the cost to the worker of losing his job and avoiding shirking tendencies
Reduce labor turnover particularly in situation of high cost of hiring and specific training
Attract more productive workforce
Make them feel fairly treated and reciprocate it Adam Smith’s Equalizing Wage Differentials proposes some principal circumstances that explain wage differences among jobs and occupations. Wage differential, which is also called an equalizing difference, is defined as the additional amount of income that a given worker must be offered in order to motivate them to accept a given undesirable job, relative to other jobs that worker could perform. The combination of the following factors greatly contributes to wage differential in the labor market: The degree of constancy of employment or job security
Cost of and length of training
Work environment and value of safety
Degree of responsibility The insider-outsider model (Lindbeck and Snower, 1984) asserts that “insiders” make cost associated with turnover high and tap it in the wage negotiation process. The insiders are those incumbent workers who enjoy more favorable employment opportunities than the outsiders. The reason for this disparity is that firms incur labor turnover costs when they replace insiders with outsiders. Examples of labor turnover costs are the costs of hiring, firing and providing firm-specific training. Insiders may resist competition with outsiders by refusing to cooperate with or harassing outsiders who try to underbid the wages of incumbent workers. The implication of this behavior for employment and unemployment is that there is absence of wage underbidding even when many unemployed workers are willing to work for wages lower than existing insider wages (normalized for productivity differences). This market power possessed by insiders tend to affect wages without recourse to relevant factors such as productivity Under trade union models, wage determination through collective bargaining tend to cause distortion & wage differentials depending on the strength of the union relative to employers. Occupational wage differences may also reflect the internal wage structures of firms and determined by two approaches – (a) transaction cost and (b) job evaluation approaches. Transaction Cost approach – jobs requiring specific idiosyncratic skills are well paid to retain the worker and minimize transaction cost Job evaluation approach often used to promote pay equity and efficiency of labor within the enterprise and also ensuring consistency with competitive conditions prevailing outside (used in the Single Spine Salary Structure). Public Sector Pay Policies The government of Liberia, since 2006, has initiated actions to reform the public services for improved service delivery through improved pay & conditions of service of public sector employees. Notable amongst these reform programs were: the Transfer of Knowledge through Expatriate National (TOKTEN) and Senior Executive Service (SES) (sponsored by the multilateral partners or donors). These reforms attracted Liberian professional both home and abroad to public sector jobs and paid them appropriately. These professionals were responsible to support nation building through the revitalization of government institution; and train or transfer knowledge to other local staff. However, the continuation or sustainability of these programs became a serious challenge to the Government after donor funds were exhausted. Nevertheless, the implementation of the TOKTEN and SES programs was the beginning of gigantic salary disparity scheme, followed by the introduction of the General and Special Allowances scheme. Compensation in the General and Special allowances scheme are solely to the discretion of the heads of the entity. Additionally, the continuous establishment of commissions and committees reflects the weaknesses and failures to achieve equity and fairness in the government pay system. Currently, the Government, through the Civil Service Agency has proposed a uniform payroll reform policy which seeks to harmonize the disparity in the government pay structure. The successful implementation of this policy will ensure uniform pay per position. This policy is being piloted by the Ministry of Finance and Development Planning (MFDP) and the Civil Service Agency (CSA). In conclusion, most of the reforms also fail to consider the cost implications for the national budget which stall implementation. Various public sector pay reforms pursued by government have either failed to correct the existing distortions or in some cases created further distortions. The fallout of previous public sector pay policy was the Inequalities in Public Service pay within and across Service Classifications, Multiplicity of allowances in the public services, and The lack of Government control over Public Service pay administration. Ezekiel Barbaye Korvah, MBA, MA, Contributing Writer