What Is an Effective Wage?

You use the term "effective wage" in economic studies, personal finance, business strategy and governmental policy. Each usage means something slightly different. In general, an effective is a wage that takes hold at a particular point or becomes usable from a particular point of view. Many businesses seek to establish effective wages, and workers -- especially those unemployed -- seek those that will work for both the external limitations of the market and the internal financial needs they have.

Effective Wage as a Net Value

Externally, employees balance a number of factors when searching for a particular wage, no matter the state of the economy. Employees have a reservation wage, which is the threshold upon which an employee will accept a position in a particular market, and it is usually in the market they are most qualified. Below this, the employee seeks alternative employment. When the value of the reservation wage combines with the risks and potentials involved in a job search throughout an industry, the result is an effective wage, at which point the employee will be willing to take a position.

Effective Wages to the Employee

To the employee, internally, effective wages tend to mean something slightly different than externally. An effective wage to a company is one that includes all forms of compensation. The state wages for an employee may be only $30,000 in salary, but the effective wage may be $50,000 when combined with bonuses, incentives and commissions from a job. Effective wages are often more important that stated salaries when an employee decides on a job.

Effective to Economies

An effective wage to an entire economy is typically a wage that covers living expenses. Economists and other types of analysts may use the term to indicate not what will cause an employee to accept a job in the market, but simply what wage will allow the market to keep functioning by offering an employee enough money to live on. Below this effective wage, the economy collapses quickly and social peace becomes strained or ends altogether.

Effective Wages Pertaining to Laws

For governments, effective wages typically refer to dates more than amounts. For example, many states have minimum wage laws that they change from year to year. As states update their regulations, the new wage becomes the effective wage at a certain date in which the old wage ceases pertaining to the law and the new version takes its place. The term "effective date" for a wage is also often used in this circumstance.

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About the Author

Tyler Lacoma has worked as a writer and editor for several years after graduating from George Fox University with a degree in business management and writing/literature. He works on business and technology topics for clients such as Obsessable, EBSCO, Drop.io, The TAC Group, Anaxos, Dynamic Page Solutions and others, specializing in ecology, marketing and modern trends.