Labour markets are very tight now and with the rate of job transitions that people have now, it should be more and more interesting for labour economists to start studying the markets and understanding if they are working efficiently, and if not, what are the distortions. While I may say distortions, they are not in and of themselves a bad thing. They actually often help us to achieve certain goals by triumphing over shortcomings in our culture. But it is important to understand their impacts anyways.
One of the distortions to labour markets is the fact that companies offer salaries to new hire based on the market rates but then give pay raises by performance. In other words, even if a staff is not performing well, typically if his experience and skills are becoming more and more scarce in the marketplace, his pay does not rise if he stays where he is. Therefore, he would switch to get a higher pay. The company which loses him has no one else to blame than their system.
At the same time, those people who performs well, but yet their skills are becoming more and more common in the marketplace, would enjoy pay raises while incoming labour supply gets lower starting wages without affecting this “top-performer”. The company justifies its decision that this person is tried and tested, have been delivering value to the company (never mind the fact actually they could have replaced him with someone cheaper and have equal skill). So he stays in the company and draws the higher pay.
In the first case, you observe that salary offered in the market tends to be higher than the prevailing salaries being paid to existing staff. As the recruiter only observes the information from newly offered salaries, the new offers tend to be higher than the actual salaries being paid out on average. In the second case, you’ll observe that people in their roles are paid pretty well while the new offers in the market tends to be quite low in comparison.
Such is a cultural distortion that may have to be corrected by increasing awareness, as well as improvements in HR.