13 Wage Determination McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
Labor, Wages, and Earnings Wages Price paid for labor Direct pay plus fringe benefits Wage rate Nominal wage Real wage-purchasing power General level of wages-see p.267 LO1 13-2
Role of Productivity Labor demand depends on productivity U.S. labor is highly productive Plentiful capital Access to abundant natural resources Advanced technology Labor quality LO1 13-3
Real Wages and Productivity Long-run trend of average real wages in the U.S. Real Wage Rate (Dollars) Quantity of Labor D 1900 S 1900 D 1950 D 2000 D 2020 S 1950 S 2000 S 2020 LO1 13-4
Real Wages and Productivity LO1 13-5
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 LO2 13-6
($10) W C ($10) W C Wage Rate (Dollars) Labor Market Quantity of Labor Wage Rate (Dollars) Individual Firm Quantity of Labor QCQC (1000) 00 d=mrp qCqC (5) s=MRC Competitive Labor Market LO2 D=MRP (∑ mrp’s) S e b a c 13-7
Monopsony Model Employer has buying power Characteristics Single buyer Labor immobile Firm “wage maker” Firm labor supply is upward sloping MRC higher than wage rate Equilibrium LO3 13-8
Examples of monopsony power-see p.272 Monopsony Model Wage Rate (Dollars) Quantity of Labor 0 S MRP MRC c b a WcWc WmWm QmQm QcQc LO3 13-9
Monopsony Power Maximize profit by hiring smaller number of workers Examples of monopsony power-rare in the U.S. Nurses-skills not easily transferrable-small town? Professional Athletes-player drafts-teams aren’t competing to hire. Three union models LO
Demand Enhancement Model Union model Increase product demand Alter price of other inputs Wage Rate (Dollars) Quantity of Labor WuWu QcQc QuQu WcWc D1D1 D2D2 S Increase In Demand LO
Wage Rate (Dollars) Quantity of Labor restrictive membership, occupational licensing (plumbers, doctors) D S1S1 QcQc WcWc S2S2 WuWu QuQu Decrease In Supply Craft Union Model LO
Industrial Union Model Inclusive unionism-ALL WORKERS Auto and steel workers Wage Rate (Dollars) Quantity of Labor D S QcQc WcWc WuWu QuQu QeQe a b e LO
Bilateral Monopoly Model Monopsony and inclusive unionism Single buyer and seller Not uncommon Indeterminate outcome Desirability LO
Bilateral Monopoly Model LO4 Wage Rate (Dollars) Quantity of Labor D=MRP S QcQc WcWc WuWu Q u =Q m MRC WmWm a 13-15
The Minimum Wage Controversy Case against minimum wage Case for minimum wage State and locally set rates Evidence and conclusions LO
Differences across occupations What explains wage differentials? Marginal revenue productivity Noncompeting groups Ability Education and training Compensating differences LO5 Wage Differentials 13-17
Wage Differentials LO
Wage Differentials Workers prevented from moving to higher paying jobs Market imperfections Lack of job information Geographic immobility Unions and government restraints Discrimination LO
Pay for Performance The principal-agent problem-shirking v. not shirking (utility) Incentive pay plan Piece rates Commissions or royalties Bonuses, stock options, and profit sharing Efficiency wages Negative side-effects LO