The theory and practice of pay setting

Abstract

This review focuses on pay variance across workers, employers and across time and illustrates how theories of pay determination can shed light on this variance. We discuss the limitations of the orthodox economic approach to pay setting and emphasise the importance of labour market imperfections and the unique character of the labour contract in determining wage outcomes. Two broad conclusions emerge: first that no single theory of pay setting has an over-riding claim to virtue; and second that, in spite of the institutional knowledge generated by industrial relations, obtaining a greater understanding of the general pattern of wages remains one of the principal challenges to the discipline at the present time