Wage compression

These issues may have varying effects on firms, employees and the overall economy, especially in times of high economic uncertainty.

Increases in minimum wage tends to result in junior (low-skilled) workers being overpaid relative to their senior (high-skilled) peers (i.e., If the minimum wage in a region increases from $20 to $25, therefore new employees receive $25 per hour, while current employees with 3 years' experience are being paid $26.50 per hour).

Albeit, high-skilled workers at these firms would likely require that their wages are also set above the market clearing rate to proportionally represent the higher starting remuneration of low-skilled workers, making such an approach impractical for most firms as higher wages would make them less competitive in the market.

The research suggesting that firms are ushered towards free training by trade unions and labour institutions through the presence of wage compression.

It can be argued that this is due to these unions and institutions seeking to reduce wage compression in firms, through up skilling currently low-skill workers.

Almeida-Santos and Mumford (2005) similarly found that firms with higher levels of wage compression are most likely to cover the costs of employee training.

[8] It can be argued that one cause of increased wage compression is the fact that higher skilled workers do not have to pay for certain training costs using their own funds.

[10] Their work suggests that as advancements are made, low skilled workers are often replaced for low-cost and efficient programs.

The presence of wage compression at a firm can have many implications for employee sentiment in regard to productivity, turnover, loyalty, skill set, and performance.

Because of this, firms that need to reduce wage costs or decrease the number of employees will prefer to fire low-skilled workers.

Santos-Pinto (2012) suggests that employers use wage offers to gesticulate a candidate's productivity or suitability in a given role.

[17] An employer's inability to individually assess and assign appropriate remuneration to an employee can lead to greater wage compression due to poor markers for success in the workplace.

[17] As women are generally disproportionately underrepresented in higher paying roles they could also potentially be seen as inordinate 'victims' of 'blanket' wage compression.