Why Should Human Resource Managers Pay High Wages?

This essay is about human resource management, internal labour markets and assorted theories of wage behaviour. A stereotype of managerial activities and policies is sketched out in the first section, which, although reflecting a parochial (US) orientation, is intended to approximate a set of real‐world conditions to which analyses of labour market behaviour should presumably relate. In the second section we consider ‘institutionalist’ interpretations, which either supplement or challenge standard market analysis by appeal to the historical record, the behavioural sciences or even the consensus of expert behaviour. In particular, the importance of ‘conventional’ forces, based heavily on perceptions of equity, interpersonal preferences and custom and practice, is revealed by the scholarship and insights of Henry Phelps Brown. Next (Section 3) are assessed the claims and contributions of a sample of theories based on the assumption of individualistic utility maximization in competitive markets: the theories of equalizing wage differentials, human capital, deferred compensation, transaction costs, implicit contracts and (least conventional) efficiency wages. None is found to be lacking in interpretive value or relevance to one or more attributes of the stereotype, and all help to relate it to a wider family of markets and to economic behaviour. In general, however, this group is less satisfactory in explaining why wages should be high enough ‐ in a present‐value sense and relative to market‐clearing levels ‐ to contribute to the relative insulation of internal labour markets and to restrict employment. An exception is provided by efficiency wage theory, in particular by one of its older variants, which, because it is based on group (rather than individualistic) psychology and behaviour, is discussed in Section 4.