The problem of how to determine wages within individual organizations is complex. There are many factors to consider and many sources of information. Although there are several internal processes, and influential factors of wage determination, what is examined below are the external factors that influence wage determination. External factors are those that operate outside of, and are beyond, the influence of any individual organization.

The various factors that are examined are; outside wages, occupational and overall unemployment rates, the product/ service market, the labor market, general economic conditions and the cost of living, legislative factors, and the spillover effect of unionism.

It is important to note that no distinction is made between wages and overall compensation. Therefore, wage rate implies both cash and benefit compensation. The wage level, as used, is the total cost of compensation to the organization.

Nonunion Wage Determination

Wages in nonunion organizations are generally determined using a system, which first analyzes the content of the various and specific jobs. This analysis is conducted using both conventional and quantitative techniques. The purpose is to collect sufficient data that will be used to describe the jobs that were analyzed.

Job Content

Once the jobs within an organization have been analyzed and described, their worth to the organization is then evaluated, and wages are determined. This evaluation of the worth of jobs, to the organization, is based on either the job content or the job value.               A wage (compensation) structure based on job content is concerned with the skills, duties, and responsibilities required for success in the incumbent jobs.

Job Value

A structure based on job value determines wages (compensation) through an analysis of the worth of the incumbent jobs, in relation to their contribution to the goals of the organization.

The application of "content and value" need not be an either or proposition. A combination of these tools can be used when creating a wage structure.

External Forces

The above description of job content and job value implies that these tools are used in isolation and are based on the analysis of jobs in relation to the specific firm or organization. It is important to remember that organizations do not operate in isolation and that forces that are external to individual organizations may influence each of these wage structures. These exogenous influences include valuing jobs in relation to the external market. Some job dimensions may be more or less valuable in the external market, and therefore, require some adjustments when determining specific wages for individual jobs.

Outside Wages and Wage Communities

Outside wages can affect the internal wage structures, and therefore wage rates and levels, of individual firms. Information on outside wages is obtained though various means of sampling. These can take the form of formal compensation surveys or informal information gathering. The purpose of the information, and the need for accuracy, will determine the sophistication of the method. The samples of outside wages are inevitability obtained from the external labor market and it is important that this information come from sources which are in the organization´s own "wage community".

The wage community consists of employers who compete for the same labor, in the same geographical are, and who compete in the product/service market. Non-wage developments in the labor and relevant product/ service markets, can also affect individual wage rates.

Market Influences

Unemployment rates (occupational and overall) in the labor market influence wages through their affect on the organization´s ability to attract and retain employees.           The product/service market is a valuable source of information in determining pay rates and levels. This is so because the demand for labor is a derived demand that is dependant on the demand for the products and services produced by labor.

The elasticity of demand for the organization´s product/ service puts a lid on the maximum pay level it can afford. Elasticity of demand is a measure that defines the ability of a factor (product) to withstand a change (increase) in its price. The more inelastic the demand for a product/ service, the less its demand (sales) will be affected by an increase in its price. Therefore, organizations with a product/service that is relatively price inelastic, can afford higher costs of labor (wage level) that can be passed on, in the form of price increases in the final product.

The concept of elasticity can be further applied to labor itself, as a factor of production. The demand for labor will be more inelastic (and therefore able to withstand price increases) if; (1) it is an essential factor of production; (2) the supply of complimentary factors of production are relatively inelastic; (3) the demand for the final product is relatively inelastic and; (4) the cost of labor is relatively small, in relation, to the total costs of production. Other external market influences in determining wages are the general state of the economy and the cost of living.

The significance of these external factors may be related to the internal economics of the organization. For example, some firms may be more able then others in dealing with fluctuations in the economy. This may be due to size, management effectiveness, etc., and, therefore, wages in these organizations will be less likely to be adversely affected by external economic factors.

Cost of Living

Conversely, some organizations may be more able to keep wages at a certain level, in line with increases in the cost of living. The measure of cost of living is valid in determining regional pay differentials. In applying regional pay differentials, multi-location organizations may compare the relative cost of living in different locations and adjust pay rates and levels accordingly.

Legislative Influences

Legislative factors are determined outside of individual organizations and affect wages. Legislative influences include labor standards, and specifically minimum wages. Many employers rely on a low skill, low wage (minimum) transient workforce. Any increase in the minimum wage affects both the rates paid to the employees and the employer´s wage level.

In addition, legislative requirements such as pay equity and employment equity increase the administrative burden and cost to the employer. These costs may affect the wage level of an organization and therefore, its wage rates.

The Union Spillover Effect

There also exists a spillover effect from the unionized sector, on wages in non-union organizations. This spillover effect manifests itself in several ways. According to Freeman and Medoff nonunion wages are affected by gains made by unions within the same firm, therefore, compensation gains obtained by unionized workers are generally passed on to non-union coworkers. There is some disagreement between studies as to whether the spillover effect crosses the boundary between blue-collar and white-collar workers. Freeman and Medoff conclude that the magnitude of the spillover effect is a function of the percent of the organization that is unionized. Therefore, the more unionized the organization is, the greater likelihood of a spillover effect, and the larger the magnitude will be.

Second, union wages will affect wages in nonunion organizations if the union wages are included in general wage surveys. As discussed previously, these surveys are used by organizations when determining wage rates. The importance of this second characteristic is that the spillover effect is a function of the extent of unionism within a "wage community". This characteristic of the spillover effect defines the impact of its potential as being greater in industries where there is a larger union presence.

The third characteristic of the spillover effect is the impact on nonunion wages, as a result of a union organizing drive within an organization. The threat of unionization can lead organizations to substantially increase wages in an attempt to thwart the efforts of the union. The wages of employees can be affected in several ways though the threat mechanism. Firstly, if the outcome of unionization is a bitter pill for an organization, the mere threat of unions may trigger a wage response. Secondly, even in the event of a successful defense against a union drive, organizations may be "under the gun" to offer higher wages to their employees. This is done to stave off any future unionization.

The spillover effect of the unionized sector also influences legislative policy, which in turn affects nonunion workers. This is accomplished through the lobbying of governments and its success is an indicator of the collective power of the union movement. The most visible outcomes of the affect of unions in affecting legislation, is the area of Fair Labor Standards.

 Conclusions

In examining the external factors that influence nonunion wage determination, it has been shown that it is a complex matter. The various factors that were examined are; the influence of outside wages, occupational and overall unemployment rates, the product/service market, the labor market, general economic conditions and the cost of living, legislative factors, and the spillover effect of unionism.

Though all of the above play a role in determining wages, it is impossible to conclude that managers have all this relevant information available when making wage decisions. Therefore, they must rely on information that is readily available, relevant, and easily deciphered. From the above analysis of the external factors, only one meets all of these criteria and it is the influence of outside wages.

The information on outside wages is generally obtained by the use of comprehensive surveys of the relevant "wage community". This community is composed of employers who compete for the same labor, in the same geographical area, and in the same product/service market. This information provides managers with data that is up to date, and relevant in terms of what the competition is doing. The managers can then apply this information in relation to the internal wage policy of the organization.

The external factors that will have the greatest influence on the content of outside wage surveys are, the union wage spillover effect ant the cost of living. The influence of the spillover effect, it was shown, is dependant on the extent of unionization within the "wage community". The cost of living is an important measure in determining wage increases that could at least maintain a standard of living.

Legislative factors are important in wage determination in that they set out minimum standards, especially minimum wages and conditions. This may be a prime factor used by some firms who rely on low skill, low pay (minimum), and transient workers. The overall administrative cost of implementing legislative requirements ay also influence the overall pay level of some organizations.

The wage decisions of managers are generally not static, such as a minimum wage policy. The dynamic nature of wage decision is necessary due to the ever-changing climate of business and the inherent competition. This competition is not only in the product/service market, but also in the labor market. The success of organizations in their respective product/ service market will influence their profitability and, therefore, their ability to pay wages. This ability to pay can then be translated into a wage determination policy that can be used as a marketing (recruitment/retention) tool in the external labor market and internal workforce. The dynamics of the decision does not however necessitate that it be completely fluid. Fluidity implies constant monitoring and adjustment, with inherent costs. The dynamics of wage determination should use the various external factors, or influences, to create a long-term policy that aligns with the various markets within which it competes.