Inelastic Nature of Labour Market Needs a Progressive Wage Structure to Equilibrate Skills and Salary Compensation

Abstract

Due to various externalities, a labour market never operates in perfect competition mode. One such externality is the inelasticity in wages introduced due to personal fulfilment and satisfaction that led to personal job preference. This meant that salary is not the sole determinant of one’s career choice, and thereby, remove one important factor that could equilibrate one’s skills and his/her salary compensation. But, there are other externalities at play. Inefficient transmission of external economic indicators into the labour market ranks as another method in which salary could be out of sync with economic fundamentals. Protected industries or career in emerging fields are examples in which salary are usually higher than the norm. Such realities in the labour market as well as the presence of externalities difficult to unwound thus presents particular challenges to national governments seeking to pull the labour market towards a better equilibrium between skills qualifications and salary compensation. Being fairer, such a labour market is the foundation on which income inequality can be ameliorated, and meritocracy could work its magic in assigning higher salary jobs to those with the necessary qualifications. More importantly, a labour market that assign appropriate value to particular skills qualifications provide a roadmap for individuals to learn new skills, and upgrade to more competitive and better paying jobs. The key question is how do we get there? One approach is to introduce a nationally certified mechanism in which a minimum salary is associated with particular skills qualifications. This mechanism assigns a higher salary to higher educational and skills qualifications, and is not restricted to traditional correlation between salary and educational qualifications. Emphasis on skills qualification is important as individuals should constantly learn and pick up new upgraded skills through continuous learning throughout their careers. Naturally, this should be compensated. Implemented across all sectors of the labour market, such a skill centred salary compensation system would collectively move the entire labour market to a better equilibrium position between skills qualifications and salary compensation. Such a system also reaps other sociological benefits in the wider society, principally in the high value placed on education, as well as charting a continuous path towards skills upgrading for the less education inclined. But, one caveat to the skill centred salary compensation scheme is the need for calibration with a nationally agreed yardstick. One option in this endeavour would be conducting surveys across and within industries to put a price on various educational and skills qualifications. Collectively, a labour market is hampered by various externalities, and is never in perfect competition mode. This meant that there may be disequilibrium in skills qualifications and salary compensation. Implementing a national skills-centred salary compensation system where salary moves in lockstep with skills qualification may be one way to achieving better income equality and seeding a learning and skills upgrading culture in a country.