Final answer:
The situation where a company must offer higher salaries to new hires due to market demand, leading to smaller differences between the pay of existing and new employees, is an example of wage compression. It points to the importance of external equity and the effects of supply and demand on wages in the labor market.
Step-by-step explanation:
The scenario mentioned is an example of wage compression. Wage compression occurs when there is only a small difference in pay between employees regardless of their skills, experience, or the demand for their expertise. In this case, the existing graphic designers at MegaCorp earn $50,000 a year, but due to increased demand for these skills in the market, new hires are being offered $75,000. This differential could lead to dissatisfaction among the current employees who may feel undervalued, and it puts pressure on the company to reevaluate the wages of existing staff to maintain external equity.
External equity refers to the situation where an employer's pay rates are competitive with those in the external labor market. In times of high supply, wages may remain stable or even decrease. However, when certain skills are in high demand and fewer people possess those skills, wages for those positions tend to increase. One important factor in this circumstance is the competition in the workforce which determines the pay rates; if skills are scarce, companies must compete to attract talent, leading to higher wages.
Current employees may perceive the difference in pay as unfair if their salaries do not reflect the increased market value for their skills. This could lead to a request for a raise or could result in valuable employees leaving for higher-paying opportunities. Businesses must balance their desire to control labor costs with the need to attract and retain skilled workers.