1. Copyright 2008 The McGraw-Hill Companies 26-1 Labor Wages and Earnings Real Wages and Productivity Purely Competitive Labor Market Monopsony Model Three Union Models Bilateral Monopoly Minimum Wage Wage Differentials Pay for Performance Last Word Key Terms End Show 26 Wage Determination

2. Copyright 2008 The McGraw-Hill Companies 26-2 Labor Wages and Earnings Real Wages and Productivity Purely Competitive Labor Market Monopsony Model Three Union Models Bilateral Monopoly Minimum Wage Wage Differentials Pay for Performance Last Word Key Terms End Show Labor Wages and Earnings Wage Rate-prices employers pay for labor Nominal Wage-amount of money received Real Wage-the purchasing power of that wage (adjusted for inflation) General Level of Wages- differ among nations, regions, occupations and individuals

3. Copyright 2008 The McGraw-Hill Companies 26-3 Labor Wages and Earnings Real Wages and Productivity Purely Competitive Labor Market Monopsony Model Three Union Models Bilateral Monopoly Minimum Wage Wage Differentials Pay for Performance Last Word Key Terms End Show

4. Copyright 2008 The McGraw-Hill Companies 26-4 Labor Wages and Earnings Real Wages and Productivity Purely Competitive Labor Market Monopsony Model Three Union Models Bilateral Monopoly Minimum Wage Wage Differentials Pay for Performance Last Word Key Terms End Show Role of Productivity Demand for labor(other resources) depends on the productivity (revenue) that that resource can generate –Plentiful Capital- $90,000 capital per worker –Access to Abundant Natural Resources –Advanced Technology –Labor Quality-health, vigor, level of education –Other Factors Management flexibility, politics, business environment, trade agreements

5. Copyright 2008 The McGraw-Hill Companies 26-5 Labor Wages and Earnings Real Wages and Productivity Purely Competitive Labor Market Monopsony Model Three Union Models Bilateral Monopoly Minimum Wage Wage Differentials Pay for Performance Last Word Key Terms End Show Wage Differentials Education Levels and Individual Annual Earnings Educational Attainment Annual Earnings (Thousands of Dollars) Age Professional Degree Bachelor’s Degree Associate’s Degree High School Diploma

6. Copyright 2008 The McGraw-Hill Companies 26-6 Labor Wages and Earnings Real Wages and Productivity Purely Competitive Labor Market Monopsony Model Three Union Models Bilateral Monopoly Minimum Wage Wage Differentials Pay for Performance Last Word Key Terms End Show Real Wages and Productivity Long Run Trend of 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

7. Copyright 2008 The McGraw-Hill Companies 26-7 Labor Wages and Earnings Real Wages and Productivity Purely Competitive Labor Market Monopsony Model Three Union Models Bilateral Monopoly Minimum Wage Wage Differentials Pay for Performance Last Word Key Terms End Show Purely Competitive Labor Market Numerous firms competing for specific type of labor Each worker has identical skills Individual firms and individual workers are “wage takers” since neither control market wage rate

8. Copyright 2008 The McGraw-Hill Companies 26-8 Labor Wages and Earnings Real Wages and Productivity Purely Competitive Labor Market Monopsony Model Three Union Models Bilateral Monopoly Minimum Wage Wage Differentials Pay for Performance Last Word Key Terms End Show Market Demand for Labor Firms in different industries demanding similar labor Market Supply for Labor Upward sloping for every employer must pay a higher wage to obtain more workers from other industries, occupations, localities or leisure Labor Market Equilibrium MRP = MRC Rule Graphically…

9. Copyright 2008 The McGraw-Hill Companies 26-9 Labor Wages and Earnings Real Wages and Productivity Purely Competitive Labor Market Monopsony Model Three Union Models Bilateral Monopoly Minimum Wage Wage Differentials Pay for Performance Last Word Key Terms End Show Wage costs Purely Competitive Labor Market Wage Rate (Dollars) ($10) W C ($10) W C Labor MarketIndividual Firm Quantity of Labor QCQC (1000) 00 D=MRP (∑ mrps) d=mrp qCqC (5) s=MRC S e c b a G 26.1 Other implicit & explicit costs

10. Copyright 2008 The McGraw-Hill Companies 26-10 Labor Wages and Earnings Real Wages and Productivity Purely Competitive Labor Market Monopsony Model Three Union Models Bilateral Monopoly Minimum Wage Wage Differentials Pay for Performance Last Word Key Terms End Show

11. Copyright 2008 The McGraw-Hill Companies 26-11 Labor Wages and Earnings Real Wages and Productivity Purely Competitive Labor Market Monopsony Model Three Union Models Bilateral Monopoly Minimum Wage Wage Differentials Pay for Performance Last Word Key Terms End Show

12. Copyright 2008 The McGraw-Hill Companies 26-12 Labor Wages and Earnings Real Wages and Productivity Purely Competitive Labor Market Monopsony Model Three Union Models Bilateral Monopoly Minimum Wage Wage Differentials Pay for Performance Last Word Key Terms End Show Three Union Models Demand Enhancement Model –Increase Product Demand –Increase Productivity –Alter the Price of Other Inputs Wage Rate (Dollars) Quantity of Labor WuWu QcQc QuQu WcWc D1D1 D2D2 S Increase In Demand

13. Copyright 2008 The McGraw-Hill Companies 26-13 Labor Wages and Earnings Real Wages and Productivity Purely Competitive Labor Market Monopsony Model Three Union Models Bilateral Monopoly Minimum Wage Wage Differentials Pay for Performance Last Word Key Terms End Show Three Union Models Exclusive or Craft Union Model –Restricted Immigration –Reduced Child Labor –Encouraged Compulsory Retirement –Shorter Hour Workweek –Exclusive Unionism –Occupational Licensing Graphically…

14. Copyright 2008 The McGraw-Hill Companies 26-14 Labor Wages and Earnings Real Wages and Productivity Purely Competitive Labor Market Monopsony Model Three Union Models Bilateral Monopoly Minimum Wage Wage Differentials Pay for Performance Last Word Key Terms End Show Craft Union Model Effectively reduce supply labor –Restrict immigration –Reduce child labor –Compulsory retirement –Shorter workweek Exclusive unionism Occupational licensing 13-14

15. Copyright 2008 The McGraw-Hill Companies 26-15 Labor Wages and Earnings Real Wages and Productivity Purely Competitive Labor Market Monopsony Model Three Union Models Bilateral Monopoly Minimum Wage Wage Differentials Pay for Performance Last Word Key Terms End Show Wage Rate (Dollars) Quantity of Labor D S1S1 QcQc WcWc S2S2 WuWu QuQu Decrease In Supply Craft Union Model 13-15

16. Copyright 2008 The McGraw-Hill Companies 26-16 Labor Wages and Earnings Real Wages and Productivity Purely Competitive Labor Market Monopsony Model Three Union Models Bilateral Monopoly Minimum Wage Wage Differentials Pay for Performance Last Word Key Terms End Show

17. Copyright 2008 The McGraw-Hill Companies 26-17 Labor Wages and Earnings Real Wages and Productivity Purely Competitive Labor Market Monopsony Model Three Union Models Bilateral Monopoly Minimum Wage Wage Differentials Pay for Performance Last Word Key Terms End Show Union Models Are unions successful? Wages 15% higher on average Consequences: –Higher unemployment –Restricted ability to demand higher wages 13-17

18. Copyright 2008 The McGraw-Hill Companies 26-18 Labor Wages and Earnings Real Wages and Productivity Purely Competitive Labor Market Monopsony Model Three Union Models Bilateral Monopoly Minimum Wage Wage Differentials Pay for Performance Last Word Key Terms End Show Minimum Wage Fair Labor Standards Act 1938 –Federal Minimum Wage 30-50% of the average wage of manufacturing workers –$3.35 1986, $5.15 2005, $7.35 2013 –States may differ from Federal Case Against the Minimum Wage –Employers will push up on Labor Demand –Some firms may have to shut-down do to significant labor cost:total cost –Poorly targeted to increase household income vs teenage workers not poor

19. Copyright 2008 The McGraw-Hill Companies 26-19 Labor Wages and Earnings Real Wages and Productivity Purely Competitive Labor Market Monopsony Model Three Union Models Bilateral Monopoly Minimum Wage Wage Differentials Pay for Performance Last Word Key Terms End Show Case For the Minimum Wage In a imperfectly competitive wage market –Higher pay may increase productivity –Reduce labor turnover Evidence and Conclusions –Uncertain, 1991 showed decrease in demand for teenage labor –Further increases have shown minimum to no decline –Has Strong Political support

20. Copyright 2008 The McGraw-Hill Companies 26-20 Labor Wages and Earnings Real Wages and Productivity Purely Competitive Labor Market Monopsony Model Three Union Models Bilateral Monopoly Minimum Wage Wage Differentials Pay for Performance Last Word Key Terms End Show Wage Differentials Average Annual Wages in Selected Occupations, 2005 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 $177,690 135,040 97,350 96,620 95,570 79,230 60,620 56,880 47,270 45,630 37,750 24,700 23,170 22,420 21,100 15,500 Source: Bureau of Labor Statistics, 2006 Occupation Annual Average Wages

21. Copyright 2008 The McGraw-Hill Companies 26-21 Labor Wages and Earnings Real Wages and Productivity Purely Competitive Labor Market Monopsony Model Three Union Models Bilateral Monopoly Minimum Wage Wage Differentials Pay for Performance Last Word Key Terms End Show Wage Differentials Workers prevented from moving to higher paying jobs Market imperfections –Lack of job information –Geographic immobility –Unions and government restraints –Discrimination O 26.2

22. Copyright 2008 The McGraw-Hill Companies 26-22 Labor Wages and Earnings Real Wages and Productivity Purely Competitive Labor Market Monopsony Model Three Union Models Bilateral Monopoly Minimum Wage Wage Differentials Pay for Performance Last Word Key Terms End Show Pay for Performance Principal(firm)Agent(employee) Problem –Arises when interests diverge –Agents slacking on job/multitasking Cyber Monday –Principals reduce Shirking by: Incentive Pay Plan Piece Rates Commissions or Royalties Bonuses, Stock Options, and Profit Sharing Efficiency Wages(above minimum wage)

23. Copyright 2008 The McGraw-Hill Companies 26-23 Labor Wages and Earnings Real Wages and Productivity Purely Competitive Labor Market Monopsony Model Three Union Models Bilateral Monopoly Minimum Wage Wage Differentials Pay for Performance Last Word Key Terms End Show Negative Side-Effects of Pay for Performance –Poor production quality –Commissions may cause unethical behavior –Bonuses may reduce cooperation –Less energetic employees get free ride –Stock options may induce executives to inflate revenues and profits

24. Copyright 2008 The McGraw-Hill Companies 26-24 Labor Wages and Earnings Real Wages and Productivity Purely Competitive Labor Market Monopsony Model Three Union Models Bilateral Monopoly Minimum Wage Wage Differentials Pay for Performance Last Word Key Terms End Show Are Chief Executive Officers (CEOs) Overpaid? Current U.S. CEO Salaries are High Relative to Domestic or Foreign Firms Several Possible Reasons Marginal Productivity Impact by Good Decisions Top Salaries Like “Prize” Goals for all to Have as a Goal Impacting Many Jobs High Salary Bias by Board Members Due to their Own Previous Performances Some Argue High Salaries are Unjustified and are Unfair to Stockholders Last Word

25. Copyright 2008 The McGraw-Hill Companies 26-25 Labor Wages and Earnings Real Wages and Productivity Purely Competitive Labor Market Monopsony Model Three Union Models Bilateral Monopoly Minimum Wage Wage Differentials Pay for Performance Last Word Key Terms End Show Key Terms wage rate nominal wage real wage purely competitive labor marketpurely competitive labor market monopsony exclusive unionism occupational licensingoccupational licensing inclusive unionism bilateral monopoly minimum wage wage differentials marginal revenue productivitymarginal revenue productivity noncompeting groupsnoncompeting groups human capital compensating differencescompensating differences incentive pay plan

26. Copyright 2008 The McGraw-Hill Companies 26-26 Labor Wages and Earnings Real Wages and Productivity Purely Competitive Labor Market Monopsony Model Three Union Models Bilateral Monopoly Minimum Wage Wage Differentials Pay for Performance Last Word Key Terms End Show Next Chapter Preview… Rent, Interest, and Profit