1. Chapter 13
Wage
Determination

2. 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

3. 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

4. Level of Wages Across Nations
Hourly Wages of Production Workers
Hourly Pay in U.S. Dollars, 2006
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

5. 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

6. 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

7. 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

8. 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

9. 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

10. 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

11. 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

12. 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

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

14. 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

15. 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

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

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

18. 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

19. 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

20. 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

21. 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

22. 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

23. 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

24. 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

25. 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

26. Next Chapter Preview…
Rent, Interest,
and Profit
13-26