When businesses pay their workers more than the market wage, they face a surplus of job applicants. This surplus allows employers to choose the most productive workers from the available pool. However, this practice prevents businesses from maximizing their profits, as they are incurring higher labor costs than the market requires.

University of Michigan - Ann Arbor

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“In a purely capitalist mode of production (i.e. where professional and labor organizations cannot limit the number of workers) the workers wages will not be controlled by these organizations, or by the employer, but rather by the market. Wages work in the same way as prices for any other good. Thus, wages can be considered as a function of market price of skill. And therefore, inequality is driven by this price. Under the law of supply and demand, the price of skill is determined by a race between the demand for the skilled worker and the supply of the skilled worker. "On the other hand, markets can also concentrate wealth, pass environmental costs on to society, and abuse workers and consumers." "Markets, by themselves, even when they are stable, often lead to high levels of inequality, outcomes that are widely viewed as unfair." Employers who offer a below market wage will find that their business is chronically understaffed. Their competitors will take advantage of the situation by offering a higher wage the best of their labor. For a businessman who has the profit motive as the prime interest, it is a losing proposition to offer below or above market wages to workers.”

What happens when business overpays their workers? & How do competing businesses repel workers?

A: Competing businesses offer higher wages to filter out workers based on productivity.

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