28 C H A P T E R HELP WANTED Wage Determination

Nominal Wages Real Wages Wages Defined... International differences... LABOR, WAGES, AND EARNINGS Wages Defined... Wages - - Salary - - Earnings Nominal Wages Real Wages International differences...

GLOBAL PERSPECTIVE Hourly Wages of Production Workers, Selected Nations Hourly Pay in U.S. Dollars, 1999 0 4 8 12 16 20 24 28 32 Germany Switzerland Denmark Sweden Japan United States France Italy United Kingdom Australia Canada Korea Taiwan Portugal Source: U.S. Bureau of Labor Statistics

Role of Productivity Plentiful Capital Abundant Natural Resources GENERAL LEVEL OF WAGES Role of Productivity Plentiful Capital Abundant Natural Resources Advanced Technology Labor Quality Intangible Factors

Growth in real income (earnings) Growth in output per worker-hour REAL WAGES AND PRODUCTIVITY Growth in real income (earnings) Growth in output per worker-hour Can only grow at about the same rate! Secular Growth of Real Wages

PURELY COMPETITIVE LABOR MARKET Many Firms Numerous Qualified Workers “Wage Taker” Behavior Market Demand for Labor Market Supply of Labor

LABOR SUPPLY AND DEMAND PURELY COMPETITIVE MARKET Quantity of Labor Wage Rate (dollars) Includes Normal Profit Non- Labor Costs S = MRC Wc $10 $10 $10 $10 $10 $10 Wc ($10) Labor Costs D = MRP ( mrp’s) d = mrp (1000) (5) Labor Market Individual Firm

LABOR SUPPLY AND DEMAND PURELY COMPETITIVE MARKET Marginal Resource Cost (MRC) will be constant and equal to resource price (the wage rate) S Quantity of Labor Wage Rate (dollars) Includes Normal Profit Non- Labor Costs S = MRC Wc $10 $10 $10 $10 $10 $10 Wc ($10) Labor Costs D = MRP ( mrp’s) d = mrp (1000) (5) Labor Market Individual Firm

Upward-Sloping Supply MONOPSONY MODEL Single Buyer of a type of labor The type of labor is relatively immobile “Wage Maker” Behavior Upward-Sloping Supply Curve to Firm

MONOPSONISTIC LABOR MARKET In monopsony MRC lies above the supply curve Wage Rate (dollars) Quantity of Labor

MONOPSONISTIC LABOR MARKET MRC S MRP = MRC Wage Rate (dollars) Wm MRP Qm units of labor hired Qm Quantity of Labor

MONOPSONISTIC LABOR MARKET MRC S The competitive solution would result in a higher wage and greater employment Wage Rate (dollars) Wc Wm MRP Qm Qc Quantity of Labor

MONOPSONISTIC LABOR MARKET Monopsonists maximize profits by hiring a smaller number of workers and thereby paying a less-than- competitive wage rate. MRC S The competitive solution would result in a higher wage and greater employment Wage Rate (dollars) Wc Wm MRP Qm Qc Quantity of Labor

THREE UNION MODELS Demand-Enhancement Model Wage Rate (dollars) Wc D1 Qc Quantity of Labor

THREE UNION MODELS Demand-Enhancement Model ...by increasing product demand S Wage Rate (dollars) Wu Wc D2 D1 Qc Qu Quantity of Labor

THREE UNION MODELS Demand-Enhancement Model ...by increasing product demand productivity S Wage Rate (dollars) Wu Wc D2 D1 Qc Qu Quantity of Labor

THREE UNION MODELS Demand-Enhancement Model ...by increasing product demand productivity the price of substitutes S Wage Rate (dollars) Wu Wc D2 D1 Qc Qu Quantity of Labor

THREE UNION MODELS Exclusive or Craft Model Wage Rate (dollars) Wc D Qc Quantity of Labor

THREE UNION MODELS Exclusive or Craft Model ...restrictive membership policies S2 S1 Wage Rate (dollars) Wu Wc D Qu Qc Quantity of Labor

THREE UNION MODELS Exclusive or Craft Model ...restrictive membership policies ...restricting labor supply of the economy as a whole S2 S1 Wage Rate (dollars) Wu Wc D Qu Qc Quantity of Labor

THREE UNION MODELS Exclusive or Craft Model ...restrictive membership policies ...restricting labor supply of the economy as a whole …occupational licensing S2 S1 Wage Rate (dollars) Wu Wc D Qu Qc Quantity of Labor

THREE UNION MODELS Inclusive or Industrial Model ...by organizing virtually all workers and thereby control of the supply curve for labor causing… S Wage Rate (dollars) Wc D Qc Quantity of Labor

THREE UNION MODELS Inclusive or Industrial Model ...by organizing virtually all workers and thereby control of the supply curve for labor causing… S Wage Rate (dollars) Wu Wc D D Qu Qc Quantity of Labor

WAGE INCREASES AND UNEMPLOYMENT Union members receive about 15% higher wages Negative impact on level of employment Negative unemployment effect reduced by: Growth Elasticity

BILATERAL MONOPOLY MODEL cannot determine the actual outcome. Monopsonist & Union Seek Different Wage Rates... Wu Wage Rate (dollars) D Quantity of Labor Wc Qc S Qu=Qm Wm …economic theory cannot determine the actual outcome.

BILATERAL MONOPOLY MODEL cannot determine the actual outcome. Monopsonist & Union Seek Different Wage Rates... S …economic theory cannot determine the actual outcome. Wage Rate (dollars) Wu Wc Wm D D Desirability of Bilateral Monopoly Qu=Qm Qc Quantity of Labor

MINIMUM WAGE CONTROVERSY Case Against Minimum Wage Case For Minimum Wage Evidence and Conclusions

WAGE DIFFERENTIALS Marginal Revenue Productivity Noncompeting Groups Ability Education and Training Investment in Human Capital

Compensating Differences Market Imperfections WAGE DIFFERENTIALS Compensating Differences Nonmonetary Differences Market Imperfections Lack of Job Information Geographical Immobility Unions & Government Restraints Discrimination

PAY FOR PERFORMANCE The Principal-Agent Problem Incentive Pay Plan Piece Rates Commissions or Royalties Bonuses, Stock Options, & Profit Sharing Efficiency Wages

Negative Side-Effects of Pay for Performance Poor Product Quality Questionable or Fraudulent Sales Practices Disruption of Teamwork Free Ride by Low Producers Low Turnover Decreases Hiring Opportunities

Chapter Conclusions PAY FOR PERFORMANCE Negative Side-Effects of Pay for Performance Poor Product Quality Questionable or Fraudulent Sales Practices Disruption of Teamwork Free Ride by Low Producers Low Turnover Decreases Hiring Opportunities Chapter Conclusions

KEY TERMS nominal wage real wage purely competitive labor market monopsony exclusive unionism occupational licensing inclusive unionism bilateral monopoly minimum wage wage differentials marginal revenue productivity noncompeting groups investment in human capital compensating differences incentive pay plan Copyright McGraw-Hill/Irwin 2002 BACK END

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