How are salaries decided?

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avatar of @retaliatorr
2 years ago - 2 minutes read


The salary can be thought of as the agreed price between a buyer and a seller. The buyer is a company, who buys Work from the seller, their new employee.

As such, this price is mainly influenced by supply and demand.

The Labor Market

That said, the labor market has many quirks that deviate real salaries from the ones predicted by Supply and Demand.

Below-Market Salaries

Often the money paid to works is less than you'd expected. This comes to, mainly, one of two reasons:

Discriminatory Salaries


Companies can choose to pay less to some workers based on some irrational factor, like Gender, Age, or Ethnicity. This means that even if your output is good, you might end up receiving less money because of employers' bias.


Much less known than Monopolies, Monopsonies are entities that have all the buying power in a given market (instead of all the selling power).

Labor Monopsonies can pay less to their workers because they don't have any other businesses they can work at.

Above-market Salaries

Other times, Salaries are being paid at an above-market rate, for one of usually three reasons:

Efficiency Salaries

A employer can pay more to some or all of their works in order to increase their happiness, and therefore, their productivity.



Unions can use collective bargaining to increase salaries and wages for workers of a single market or company.

Minimum Salary

The final reason is probably one of the most obvious. Salaries can't go below the values set by the Government, even if employer and employee both wanted to.


Salaries are complicated, but they are understandable. Now you too can comprehend why sometimes things are as clear cut as just "raise salaries to make people happier" or "lower salaries to increase investments made by corporations".

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