1. 15-1 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 8e, by Jackson & McIver By Muni Perumal, University of Canberra, Australia Chapter 15 Wage determination

2. 15-2 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 8e, by Jackson & McIver By Muni Perumal, University of Canberra, Australia Learning objectives Understand the forces underlying the general level of wage rates in Australia See how wage rates are determined, in particular, labour markets, by presenting several representative labour market models Analyse the impact of unions on the structure and level of wages Discuss the economic effects of minimum wages Explain wage differentials

3. 15-3 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 8e, by Jackson & McIver By Muni Perumal, University of Canberra, Australia Wages Wages rates –Price paid for the use of labour Earnings –Wage rates and the number of hours or weeks of labour service supplied in the market

4. 15-4 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 8e, by Jackson & McIver By Muni Perumal, University of Canberra, Australia Nominal vs real wages Nominal wages –Amount of money received by an individual or group during some period of time Real wages –Amount of goods and services an individual or group can purchase with their nominal income during some period of time

5. 15-5 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 8e, by Jackson & McIver By Muni Perumal, University of Canberra, Australia General level of wages The general or average level of wages is a composite index encompassing a wide range of specific wage rates Role of productivity –Partly determines the demand for labour –The greater the productivity of labour, the higher the demand for it

6. 15-6 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 8e, by Jackson & McIver By Muni Perumal, University of Canberra, Australia Productivity in Australia Labour in Australia is highly productive. Why? High quality and quantity of capital –The average Australian worker is assisted by $188 644 of investment capital Abundant natural resources –Natural resources are very abundant in relation to the size of the labour force Technological advances –The level of technological advance is generally higher in Australia than in many other countries

7. 15-7 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 8e, by Jackson & McIver By Muni Perumal, University of Canberra, Australia Productivity in Australia (cont.) Labour in Australia is highly productive. Why? Labour quality –Superior health, vigour, education and training of Australian workers Other factors –Management flexibility –Stable socio-political environment –Size of domestic and overseas markets enables firms to realise economies in production

8. 15-8 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 8e, by Jackson & McIver By Muni Perumal, University of Canberra, Australia Output per hour and average hourly earnings

9. 15-9 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 8e, by Jackson & McIver By Muni Perumal, University of Canberra, Australia Wage determination in competitive labour market Characteristics of a purely competitive labour market: Many firms competing for labour Many qualified workers acting as independent suppliers Both firms and workers are ‘price takers’; that is, ‘wage takers’ MRC is constant and equal to resource price Individual firm will find it profitable to hire up to the point at which the going wage rate is equal to MRP of labour

10. 15-10 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 8e, by Jackson & McIver By Muni Perumal, University of Canberra, Australia Wage determination in competitive labour market (cont.) Market demand for labour –Obtained by summing horizontally the labour demand curves of individual firms Market supply of labour –Supply curve is up-sloping: higher wages are necessary for more labour

11. 15-11 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 8e, by Jackson & McIver By Muni Perumal, University of Canberra, Australia Wage determination in competitive labour market (cont.) Market equilibrium –MRC is constant and equal to resource price –Individual firm will find it profitable to hire up to the point at which the going wage rate is equal to MRP of labour

12. 15-12 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 8e, by Jackson & McIver By Muni Perumal, University of Canberra, Australia Supply & demand for labour: competitive labour market Wage rate (dollars) Quantity of labour Individual firm Market D D = MRP (  of MRPs) S S = MRC WcWc WcWc ($6) d d MRP curve qcqc QcQc ($6)

13. 15-13 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 8e, by Jackson & McIver By Muni Perumal, University of Canberra, Australia Wage determination: monopsony Monopsony is a market in which there is only one buyer of a resource The firm dominates employment of a particular type of labour Immobile or inflexible labour type Firm is a ‘wage maker’

14. 15-14 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 8e, by Jackson & McIver By Muni Perumal, University of Canberra, Australia Wage determination: monopsony (cont.) Characteristics –Up-sloping labour supply curve –MRC exceeds wage rate Equilibrium –Up to point where MRC = MRP Results –Lower wages, employment levels and output

15. 15-15 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 8e, by Jackson & McIver By Muni Perumal, University of Canberra, Australia Monopsonistic labour market Wage rate (dollars) S Quantity of labour MRC MRP QmQm WmWm b C a WcWc QcQc The competitive solution would result in a higher wage and greater employment

16. 15-16 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 8e, by Jackson & McIver By Muni Perumal, University of Canberra, Australia Wage determination: monopsony Complication — monopoly power in product market Restrictive monopoly or oligopoly –Resource demand curve is depressed –Even lower wages, and fewer employment Progressive monopoly –Resource demand curve shifts to the right –Increases labour volumes

17. 15-17 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 8e, by Jackson & McIver By Muni Perumal, University of Canberra, Australia Supply imperfections: some union models Unions –Basic objective: increase wage rates. How? Three alternative models 1.Increasing the demand for labour 2.Exclusive or craft unionism  Exclusive unionism — higher wages by excluding workers from the union and therefore the supply of labour  Occupational licensing — law prohibits people from practising a trade if they do not meet specific requirements

18. 15-18 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 8e, by Jackson & McIver By Muni Perumal, University of Canberra, Australia D2D2 Demand-enhancement union model Wage rate (dollars) Q of labour D W1W1 Q1Q1 S Q2Q2 W2W2

19. 15-19 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 8e, by Jackson & McIver By Muni Perumal, University of Canberra, Australia Exclusive or craft union model Wage rate (dollars) Q of labour D W1W1 Q1Q1 S1S1 W2W2 Q2Q2...restrictive membership policies S2S2...restricting labour supply of the economy as a whole

20. 15-20 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 8e, by Jackson & McIver By Muni Perumal, University of Canberra, Australia Supply imperfections: some union models Unions –Basic objective: increase wage rates. How? Three alternative models 3.Inclusive or industrial unionism –Industrial unions are one where all available workers become members of the union. The unions through control of the supply of labour may impose a wage rate above the competitive equilibrium wage rate

21. 15-21 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 8e, by Jackson & McIver By Muni Perumal, University of Canberra, Australia Inclusive unionism model Wage rate (dollars) S Quantity of labour D WcWc QcQc WuWu...by organising virtually all workers and thereby control of the supply curve for labour ba

22. 15-22 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 8e, by Jackson & McIver By Muni Perumal, University of Canberra, Australia Wage increases and unemployment Union efforts to bolster wages may reduce employment Reducing unemployment impact –Economic growth –Elasticity of demand for labour

23. 15-23 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 8e, by Jackson & McIver By Muni Perumal, University of Canberra, Australia Wage determination: bilateral monopoly A market in which there is a single seller and a single buyer of labour Big industry and big union Effect on wages is indeterminable and depends on the power of the respective parties Desirability

24. 15-24 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 8e, by Jackson & McIver By Muni Perumal, University of Canberra, Australia S Bilateral monopoly model WuWu Q u = Q m Wage rate (dollars) Quantity of labour D WcWc … economic theory cannot determine the actual outcome WmWm QcQc MRC

25. 15-25 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 8e, by Jackson & McIver By Muni Perumal, University of Canberra, Australia Minimum wages An anti-poverty device Case against minimum wages –Higher wages may force some firms out of business –Increased unemployment –Lower wages are better than no wages Case for minimum wages –Higher wages may cause a monopsonist to stop restricting employment –Increased productivity

26. 15-26 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 8e, by Jackson & McIver By Muni Perumal, University of Canberra, Australia Minimum wages (cont.) Empirical evidence –Evidence from overseas studies suggests that periodic increase in the minimum wage are followed by decline in employment in affected industries –Those in employment tend to receive higher wages and tend to escape poverty –Overall result: a mixed and ambiguous one

27. 15-27 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 8e, by Jackson & McIver By Muni Perumal, University of Canberra, Australia Wage differentials: causes Heterogeneity of workforce –Ability –Education –Training Variety of attractiveness of jobs Market imperfections

28. 15-28 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 8e, by Jackson & McIver By Muni Perumal, University of Canberra, Australia Wage differentials: causes (cont.) Non-competing groups –Ability –Investing in human capital: education and training Compensating differences

29. 15-29 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 8e, by Jackson & McIver By Muni Perumal, University of Canberra, Australia Educational attainment, age and average weekly earnings of full-time workers

30. 15-30 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 8e, by Jackson & McIver By Muni Perumal, University of Canberra, Australia Wage differentials: causes (cont.) Imperfection in labour market –Geographical immobilities –Institutional immobilities –Sociological immobilities in the form of discrimination

31. 15-31 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 8e, by Jackson & McIver By Muni Perumal, University of Canberra, Australia Next chapter: Rent, interest and profits