Labor Economics and Compensation Theory

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Labor Economics and Compensation Theory

For a significant period of time compensation has been viewed as a part of a transaction between an employee and an employer which results in an employment contract. From the employee’s point of view, pay is a necessity in life.


However, with the notion that compensation policies are strategic, thereby affecting the missions of the organization, has gained considerable currency in the last couple of decades. This is part of the current popularity of all things strategic. The importance of a strategic perspective on compensation rests on three fundamental tenets. The first is that compensation policies and practices differ widely across organizations and across employee groups within organizations and thus presents a potential source of competitive advantage. The second tenet rests on the anticipation of potential changes in the competitive environment that can influence the compensation management system. Perhaps most fundamental of all the tenets on which a strategic perspective on compensation is based is the belief that fitting compensation systems to environmental and organizational conditions makes a difference; that systematic variation in compensation systems is more than random noise; that making compensation policies and practices contingent on organizational and environmental conditions has some desired effects on employee behaviors and the performance of organizations.


This course will introduce you to the way economists think about the labor market. Unlike many other markets, the labor market is one in which most of you will participate at some point in your lives (if you don’t already). Besides that, the labor market is pretty interesting because the commodity traded – the ability to perform work – cannot be separated from human beings. We will discuss the characteristics of this unique market, how this market is organized and what implications this has for individual outcomes. After that, we will turn to various issues of compensation policies. This part of the course is very much related with Human Resource Management (HRM); such as job analysis, wages and salary administration and performance appraisal.

ECN – 201: Principles of Microeconomics, MKT – 201 Principles of Marketing, HRM – 301 Human Resource Management

  1. It is the student’s responsibility to gather information about the assignments and covered topics during the lectures missed. Regular class attendance is mandatory. Points will be taken off for missing classes. Without 70% of attendance, sitting for final exam is NOT allowed. According to IUB system students must enter the classroom within the first 20 minutes to get the attendance submitted.
  2. The date and syllabus of quiz, midterm and final exam is already given here, however, announcements will be given ahead of time. There is NO provision for make-up quizzes.
  3. The reading materials for each class will be given prior to that class so that student may have a cursory look into the materials.
  4. Class participation is vital for better understanding of sociological issues. Students are invited to raise questions.
  5. Students should take tutorials with the instructor during the office hours. Prior appointment is required.
  6. Students must maintain the IUB code of conduct and ethical guidelines offered by the School of Business.
  7. Students must refrain from any type of cheating and/or plagiarism in a course. Any student acting otherwise will receive an “F” grade in the course. School of Business, IUB, maintains a zero tolerance policy regarding violation of academic integrity.
  1. Students are not allowed to keep bags, handouts, books, mobile phones, smart watches or any other smart electronic devices with them during any exam. Students are advised to keep everything in the front of the class room before the exam starts. Please note that, just carrying any smart electronic devises (even if the devise is turned off or put it in silent mode) during the exam will be considered as “cheating”. Moreover, during the exam, anything written on hand palms (or anywhere else) and carrying paper materials (whatever is written) will be considered as “cheating”. Any sorts of “cheating” will result in an “F” grade with no exception. During the exam, students are only allowed to carry pen, pencil, eraser, sharpener, ruler, highlighter and calculator in a clear plastic bag.
Type of Evaluation Nos. Weight
Class Attendance and Participation 100% 5
Quiz (Best two will be counted) 5 15
Project and Presentation 01 10
Midterm Exam 01 30
Final Exam 01 40
Total   100%

[Class attendance is mandatory; failure to do so may deduct the final marks]

The following chart will be followed for grading. This has customized form the guideline provided by the school of Business.

A A- B+ B B- C+ C C- D+ D F
90-100 85-89 80-84 75-79 70-74 65-69 60-64 55-59 50-54 45-49 0-44

* Numbers are inclusive

The course will be based mostly on the following books [some other books and journals may be referred time to time]:

  • Milkovich, G. T., & Newman, J. M., Compensation, 9thedition. Boston: Irwin/McGraw-Hill.


Link to virtual learning system: (School of Business – Faculty name- Login as a guest- password is 1234).

Week Topic Chapters
1 The course begins with a brief introduction about the course. No question would come in the exam from this session but, understanding the learning methodology of learning is pivotal to get a good grade. N/A
1-2 Basic Economic tools like demand, supply, and elasticity; how laws of economics can be applied in labour market. Materials would be provided
3 Reward Management System and the role of compensation Ch 1, additional materials would be provided
4 Compensation and its strategic role in HRM Ch 2
5 Defining internal and external consistency Ch 3
6 Job analysis & Job evaluation options Ch 4,5
8 Defining internal and external competitiveness Ch 7,8
9 Performance based payment Ch 9, 10
10 Benefits determination process and options Ch 12, 13
11 Compensation of special group Ch 14
12 International Pay systems and Presentations Ch 16
13 Final Exam

Students who are willing to audit the course are welcome during the first two classes and are advised to contact the instructor after that.

Plagiarism- that is the presentation of another person’s thoughts or words as though they were the students’ own – must be strictly avoided. Cheating and plagiarism on exam and assignment are unacceptable.

Please see the green book for further information about academic regulation and policies, including withdrawal and grading, apples and penalties for pilgrims and academic misconduct.

Students with disabilities are required to inform the School of Business/ Department of Economics of any specific requirement for classes or examination as soon as possible.