Firms differ in the skill compositions of their labour forces because higher-skilled labour is not always the most profitable type of labour to hire.
A profit-minded firm seeks low costs per unit of labour. In truth, nothing is expensive or cheap. This is because buyers will keep buying until the marginal cost equals the marginal benefit. The next unit was not purchased because it wasn’t worth the cost. The last unit was bought because its cost just matched its benefit.
The most cost-effective labour is the labour with the lowest ratio of wages to output. Low cost per unit of output is the goal whether it is comes from low wages or high labour productivity (Lazear 1998).
The wage spread between high quality and lower quality workers is large enough such that no employer hiring lower quality workers can profitably switch to hire higher quality recruits and no firms hiring high-quality workers will switch to hire lower quality recruits (Lazear 1998).
Employers will buy more of an under-priced skill until the returns to labour equalise again across different skill levels and the hiring of any more of the hitherto mispriced skill is no longer profitable because of rising wages.
Firms of all sizes will revisit their skills strategies when market conditions change if they hope to survive in their new circumstances.
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