1. 28
C H A P T E R
HELP
WANTED
Wage Determination

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

3. GLOBAL PERSPECTIVE Hourly Wages of Production Workers,
Selected Nations
Hourly Pay in U.S. Dollars, 1999
Germany
Switzerland
Denmark
Sweden
Japan
United States
France
Italy
United Kingdom
Australia
Canada
Korea
Taiwan
Portugal
Source: U.S. Bureau of Labor Statistics

4. 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

5. 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

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

7. 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

8. 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

9. 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

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

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

12. 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

13. 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

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

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

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

17. 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

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

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

20. 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

21. 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

22. 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

23. 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

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

25. 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.

26. 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

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

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

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

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

31. 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

32. 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

33. 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

34. Next:
Rent, Interest, and Profits
Chapter 29