Chapter 13 Wage Determination

Chapter Objectives Labor productivity and real compensation Wage and employment determination Competitive and monopsony markets Unions and wage rates Causes of wage differentials “Pay-for-Performance” plans 13-2

Labor Wages and Earnings Price paid for labor Direct pay plus fringe benefits Wage rate Nominal wage Real wage General level of wages 13-3

Level of Wages Across Nations Hourly Wages of Production Workers Hourly Pay in U.S. Dollars, 2006 0 5 10 15 20 25 30 35 Germany Sweden Switzerland United Kingdom Australia Canada Italy France United States Japan Spain Korea Taiwan Mexico Source: U.S. Bureau of Labor Statistics, 2006 13-4

Role of Productivity Labor demand depends on productivity U.S. labor highly productive Plentiful capital Access to abundant natural resources Advanced technology Labor quality Other factors 13-5

Real Wages Long run trend of average real wages in the U.S. Variation across occupations S2020 S2000 S1900 S1950 Real Wage Rate (Dollars) D2020 D2000 D1950 D1900 Quantity of Labor 13-6

Competitive Labor Market Market demand for labor Sum of firm demand Example: carpenters Market supply for labor Upward sloping Competition among industries Labor market equilibrium MRP = MRC rule 13-7

Competitive Labor Market Individual Firm a S e b Wage Rate (Dollars) ($10) WC Wage Rate (Dollars) s=MRC ($10) WC D=MRP (∑ mrp’s) d=mrp c QC qC (1000) (5) Quantity of Labor Quantity of Labor 13-8

Monopsony Model Employer has buying power Characteristics Single buyer Labor immobile Firm “wage maker” Firm labor supply upward sloping MRC higher than wage rate Equilibrium 13-9

Monopsony Model Examples of monopsony power MLB rookies, nurses? MRC S b Wage Rate (Dollars) a Wc Wm c MRP Qm Qc Quantity of Labor Examples of monopsony power MLB rookies, nurses? 13-10

Demand Enhancement Model Union model Increase product demand lobbying Alter price of other inputs complements S Increase In Demand Wu Wage Rate (Dollars) Wc D2 D1 Qc Qu Quantity of Labor 13-11

Craft Union Model Effectively reduce supply of labor Restrict immigration Reduce child labor Compulsory retirement Shorter workweek Exclusive unionism Plumbers, carpenters Occupational licensing Teachers! 13-12

Craft Union Model Quantity of Labor S2 S1 Wage Rate (Dollars) Decrease Wu Decrease In Supply Wc D Qu Qc Quantity of Labor 13-13

Industrial Union Model Inclusive unionism Auto and steel workers - get paid or strike? S Wage Rate (Dollars) a b Wu e Wc D Qu Qc Qe Quantity of Labor 13-14

Union Models Are unions successful? Wages 15% higher on average Consequences: Higher unemployment Restricted ability to demand higher wages and still keep members employed 13-15

Bilateral Monopoly Monopsony and inclusive unionism Single buyer and seller Not uncommon Indeterminate outcome Desirability 13-16

Bilateral Monopoly Quantity of Labor S MRC Wage Rate (Dollars) a D=MRP Wu a Wc Wm D=MRP Qu=Qm Qc Quantity of Labor 13-17

Minimum Wage Case against minimum wage Case for minimum wage Less jobs, poorly targeted Case for minimum wage More jobs? (monopsony) Increase productivity, decrease turnover State and locally set rates Evidence and conclusions 13-18

Wage Differentials Average Annual Wages, 2007 Occupation Annual Average Wages Surgeons Aircraft Pilots Petroleum Engineers Financial Managers Law Professors Chemical Engineers Dental Hygienists Registered Nurses Police Officers Electricians Travel Agents Barbers Retail Salespersons Recreation Workers Teacher Aides Fast Food Cooks $191,410 148,810 113,890 106,200 95,510 84,240 64,910 62,480 50,670 48,100 32,190 25,860 24,530 23,790 22,820 16,860 Source: Bureau of Labor Statistics, 2006 13-19

Labor Supply and Demand Differences across occupations Explains wage differentials Marginal revenue productivity Noncompeting groups Ability Education and training Compensating differences Construction vs. retail 13-20

Education and Annual Earnings Educational Attainment Professional Degree Annual Earnings (Thousands of Dollars) Bachelor’s Degree Associate’s Degree High School Diploma Age 13-21

Wage Differentials Workers prevented from moving to higher paying jobs Market imperfections Lack of job information Geographic immobility Unions and government restraints Discrimination 13-22

Pay for Performance The principal-agent problem Negative side-effects Incentive pay plan Piece rates Commissions or royalties Bonuses, stock options, and profit Sharing Efficiency wages Negative side-effects 13-23

Are CEOs Overpaid? U.S. CEO salaries relatively high Good decisions enhance productivity Limited supply, high MRP Incentive to raise productivity at all levels High salary bias by board members Unsettled issue 13-24

Key Terms wage rate 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 human capital compensating differences incentive pay plan 13-25

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