Human capital theory attempts to explain the relationships between productivity, employee skill level and average pay. Some theories explain that higher skill level obtained through education can greatly affect supply and demand of workers in certain categories. Another human capital theory states that wages can be largely determined by the nature of the job, which can directly influence supply and demand. Employers can also seek a maximum return on investment from their employees, which is simply the revenue and efficiency gained from the work produced minus labor and training costs.
According to some forms of human capital theory, the amount of education a worker obtains directly correlates to both job satisfaction and income. If a highly-educated worker is employed in a position beneath his knowledge and skill level, he is more likely to become dissatisfied. This may lead to turnover if the job market conditions are in the employee's favor. For example, another employer may offer the individual a position with more responsibility, more specialized job duties or a pay rate more in line with his qualifications.
Higher levels of pay are not necessarily associated with advanced education or skill. Some industries and positions may need to offer lucrative salaries in order to lure workers. For example, construction and delivery jobs that expose workers to increased danger and potential injuries need to supply an incentive to candidates. According to some forms of human capital theory, if the higher pay is not offered, companies may not be able to hire a qualified work force in adequate numbers.
Supply and demand factors are a large part of human capital theory. Professions that receive an influx of applications from skilled workers may offer lower wages whereas jobs that are not popular, but are in need of highly skilled workers, may offer above-average pay. Supply and demand could also drive competitiveness between companies' recruiting departments. At times when the labor market is flooded with skilled workers, average market pay tends to be driven down, yet certain professions may be unaffected due to a high need and a low supply of suitable candidates.
When companies determine pay rate structure, they are often looking to maximize their return on labor costs. Since wages and benefits can be one of the more hefty expenses that a company will occur, they may employ various creative methods to increase returns. Some of those tactics include job-sharing, where two individuals share the same job and split a full-time salary. Other companies hire fewer workers to tackle more responsibility and may only increase the pay slightly or have a results-oriented pay structure.
