Determinants of Earnings

Determinants of Earnings Improving someone’s success in the labour market is a main objective of both family and policy makers, especially those with low earning in recent years. In the classic view of labour earning, we assume that the skills of individuals are the dominant factor to determine the earnings’ level. However, the recent year study manifests multiple factors have been weighed more than before.

To illustrate this new situation, it believes that individuals’ successes in labour market are quite differentiated from one’s family background support, capacities to contribute to production or service, genetics, the education level, and the working experience in the labour market. Specifically, the low earning individuals’ situation can be well-persuasive proof for it. An individual might hold various earnings at the same time such as the interest of saving, stock, fund of dividend income and property of real estate of individual.

The developed labour market economy directs that an individual’s earning is equal to the number of production factors sold by the individual times the price of various elements. Personal income is equal to market income and transfer payment. A majority of market income comes from wages and salaries. Few of market income come from property rights. The transfer payment of the government is mainly for those old men’s social security. In standard of earning equation for individuals of the same race and sex in Canada, between two thirds and four fifth of the variance of the natural logarithm of wages or of annual earning is unexplained by the above variables. ” This statement is said by Bowles (2001). A few of the variance is contributed by the unstable factor of earnings and response error. For example, from the more detailed Employers’ Manpower and Skills Practices Survey of 1693 British employers reported in Green, Machin and Wilkenson (1998).

Of the somewhat more than a third of the establishments reporting the “skill shortage”, personnel managers identified the recruitment problem as “lack of technical skills” in 43 percent of the cases. However, “poor attitude, motivation, or personality” in a remarkable 62 percent of the cases. Poor attitude was by far the most important reason for the recruitment difficulty given. The importance of motivation relative to technical skill was even greater among the full sample. Such a model, however, is readily provided, even within a fully competitive framework.

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If disequilibrium rents arising from technological or other shocks are persistent and if labor services are not subject to enforceable contracts, individual behavioral traits unrelated to productive capacities may bear a positive price. For example, aspects of an individual’s personality such as fatalism or impatience may reduce the likelihood of capturing disequilibrium rents and dampen the employee’s response to common employer strategies aimed at eliciting high levels of labor effort.

Furthermore, the behavioral traits that contributed to high income in some works might have the negative effects. For instance, an individual who prefer not to subordinate himself to others will be highly successful in some works, but abject failures in others. “Understanding why individual characteristics that are not skills may be rewarded in a competitive labor market may enhance the explanatory power and policy relevance of the human capital model by shedding some light on how schooling and other human investments raise individual earnings. ” Bowles mentioned in 2001.

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