TUTORIAL 5: What Shapes External Competitiveness?

External competitiveness refers to pay relationships among an organization’s pay relative to its
competitors. Setting a pay level that is above, below, or equal to the competitors and determining
the mix of pay forms relative to those of competitors also are the definition of external
competitiveness. There are three factors in shape external competitiveness; labour market factors,
product market factors, and organization factors.

1. Labor market

The labour market is the place where employers compete to hire the best employees and
employees compete for the best satisfying job. In both markets, employers are the buyers
and potential employees are the sellers. The labour market is an economic function with
demand and supply of labour. The market rate is where the lines for demand and labour
supply cross.

Nature of demand:

Labour demand indicates how many employees will be hired by an employer. It means how
many vacant positions in the organization are available. From there, the employers will
demand the vacant position to be filled by potential employees. In the short run, an
employer cannot change any factor of production (land, capital & entrepreneurship) except
human resources. It shows that human resources or labour can change at any time and will
lead to high turnover.

An employer’s level of production can change only if changes the level of human resources.
The employer’s demand labour coincides with the marginal product of labour. The marginal
product of labour is the additional output associated with the employment of one additional
person, with other production factors held constant. For example; A new open restaurant
 currently didn’t have a chef and their production is zero dishes. The manager hires one chef
for the restaurant. With the additional one chef, the restaurants now can produce 15
servings of dishes. The 15 dishes are marginal products of labour.

Nature of supply:

Labour of supply assumes that many people are seeking jobs. The employees are the ones
who supply the employment to the employers. The labour supply is the number of hours
people are willing and able to supply at a given wage rate.

The relationship between the supply and demand of labour can depend on variables such as
job openings, labour competition, salary data, geography, and work conditions.

RM

2500 E
rate
Pay

D
Quantity
4

Numbers of employees hired

The labour market happens when the demand for labour and supply of the labour curve
meets at the equilibrium point. Based on the graph above, it shows that the pay rate
that employers are willing to pay is RM 2500 while the supply of labour by employees is 4
person or employees.

2. Product market factors.

Product demand

Product demand describes how much customers desire a company’s product in a given
period. If the demand for a certain product increase, then the demand for employees will
also increase. However, if the supply of labour is decreased, then the pay rate will increase.
Employers need to offer higher pay rates in order to hire the employees to fulfil the demand
of the customers.

If the demand for a product is decrease, then the demand for employees will decrease.
However, if the supply of labour increases, then the pay rate will decrease.
 Degree competition

In highly competitive markets, employers are less able to raise prices without loss of
revenue. It means that the employers are not likely can set the pay rates of the employees.
They must follow what pay rates are in the market or follow the competitive companies. This
is because the employees have many options in terms of employment. In order to hire the
best employees, employers need to offer the best pay rates to attract employees to work
with them. For example, an engineer’s pay rate is RM3500 in the market. Then, the other
employers must offer above the market pay rate to attract them.

However, single sellers are able to set whatever price they choose. Single sellers mean one
seller who provides products or services to all buyers.

3. Organizational factors

Industry and technology

Labour-intensive industries tend to pay lower than technology-intensive industries.

Examples of labour intensive are agriculture, construction and coal mining. Employees
working in those industries are paid lower because of their skills and education level
required for the jobs.

However, for technology-intensive industries usually they are being paid higher because of
they need to use high skills in order to operate the machines and also must have good
knowledge regarding the technology.

Employer size

Larger organizations tend to pay more than small ones. It is because the larger organization
have bigger sources of capital or finances which can help to cover the cost of labour of their
employees.

However, for smaller organizations, they have very limited sources of financial and also
usually their business is still in the growth phase.