How do employers set salaries?

Ever wonder how a salary range is set by a business or other employer? While many factors influence a job’s salary, the fundamental concept of supply and demand generally has the largest impact.

Usually, wages scale up as a position’s experience and skills qualifications increase, and based on how much money the person in a position will generate for the organization, but the nuance of hiring and wages really depend on the labor market.

In hiring terms, supply refers to the number of available workers to do a job, and demand refers to employers’ need for workers in that field. Basically, when there are a lot of people available who can do a particular job, wages for that job are lowered. For jobs that fewer people can do – for example they require specialized education or skills – employers often offer higher wages.

Customer service representatives, for example, are paid less than doctors, because it takes a lot longer to train to be a doctor than a customer service representative. Professional athletes and performers are paid much more than either of these occupations because the supply of extremely talented and skilled athletes and performers is very small.

State labor market offices keep close track of the types of jobs employers post throughout their state. They also record the salaries for those jobs. In turn, employers often consult this information to learn what typical salaries are across their city or region. They can often find figures for starting wages and mid-range or higher salaries for more experienced workers in the same occupation. They use this information to help determine an appropriate offer range when they hire. 

In a tight labor market – one where there are few unemployed workers with the necessary skills – a company will likely be hiring someone who already has a job.  In this case, paying the average salary probably won’t lure workers from other companies.

So to pay a lower wage or even the typical salary might only attract workers who need training and development to work at the desired level. Or the employer can offer more attractive wages and benefits to attract well-qualified applicants who might already be doing similar work and are willing to leave their current employment for some reason.

Other factors that influence a job’s salary include cost of living and work location, job quality, how attractive and well-respected an employer is, leadership and supervisor quality/relationships, work schedule, and more.

Information for this blog was contributed by Luke Greiner, Regional Analyst, Minnesota Department of Employment and Economic Development.