1. 1-1 Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. Web Chapter A Wage Determination McGraw-Hill/IrwinCopyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved

2. Labor Demand Labor is the most important of the resources used by firms Labor demand is a derived demand; thus it depends on the productivity of labor the price of the good or service it helps produce WCA-2

3. Labor Demand Marginal revenue product (MRP) of labor is the change in a firm’s total revenue when it employs one more unit of labor MRP = Change in total labor Unit change in labor WCA-3

4. Labor Demand 1 2 3 4 5 6 7 8 $14 12 10 8 6 4 2 0 D = MRP WCA-4

5. Labor Demand Marginal resource cost (MRC) is the change in a firm’s total cost when it employs one more unit of labor MRC = Change in total (labor) cost Unit change in labor WCA-5

6. Labor Demand Rule for employing labor MRP = MRC Hire additional units of labor up to the point at which labor’s MRP is equal to its MRC WCA-6

7. Market Demand for Labor Changes in product demand Changes in productivity Changes in the prices of other resources WCA-7

8. Occupational Employment Trends Rising employment Services Health care Computers Declining employment Labor-saving technological change Textiles WCA-8

9. Employment Trends Occupation20082018 Percentage Increase* Biomedical engineers162872.0 Network systems and data communications analysts 29244853.4 Home health aides9221,38350.0 Personal and home care aides8171,19346.0 Financial examiners273841.2 Medical scientists, except epidemiologists 10915440.4 Physicians assistants7510439.0 Skin care specialists395437.9 Biochemists and biophysicists233237.4 Athletic trainers162237.0 Source: Bureau of Labor Statistics, www.bls.govwww.bls.gov 10 Fastest-Growing U.S. Occupations in Percentage Terms, 2008–2018 Employment, Thousands of Jobs WCA-9

10. Employment Trends Occupation20082018 Percentage Increase Textile machine workers3521-40.7 Sewing machine operators212141-33.7 Postal service workers180125-30.3 Lathe operators5641-26.7 Order clerks246182-26.1 Photographic processing machine operators5139-24.3 File clerks212163-23.4 Machine feeders and offbearers141110-22.2 Paper goods machine setters operators, tenders10381-21.5 Computer operators11090-18.6 Employment, Thousands of Jobs 10 Most Rapidly Declining U.S. Occupations in Percentage Terms, 2008–2018 WCA-10

11. Elasticity of Labor Demand Ease of resource substitutability Elasticity of product demand Ratio of labor cost to total cost E w = Percentage change in labor quantity demanded Percentage change in wage rate WCA-11

12. Market Supply of Labor Purely competitive labor market Many employers compete for a specific type of labor Many workers with identical skills supply that type of labor Individual employers are “wage takers” An individual firm’s labor supply is perfectly elastic at the market wage rate Firms use the MRP = MRC rule to determine employment at the market wage WCA-12

13. Market Supply of Labor ($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 D = MRP (∑ mrps) S WCA-13

14. Wage and Employment Determination (1) Units of Labor (2) Wage Rate (3) Total Labor Cost (Wage Bill) (4) Marginal Resource (Labor) Cost 0$10$0 110 $10 2102010 3 3010 4 4010 5 5010 6 6010 The Supply of Labor: Pure Competition in the Hire of Labor WCA-14

15. 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 WCA-15

16. Examples of monopsony power Monopsony Model Wage Rate (Dollars) Quantity of Labor 0 S MRP MRC c b a WcWc WmWm QmQm QcQc WCA-16

17. Monopsony Power Maximize profit by hiring smaller number of workers Examples of monopsony power Nurses Professional athletes Teachers Three union models WCA-17

18. Union Models WCA-18

19. Craft Union Model Effectively reduces supply of labor Restricts immigration Reduces child labor Encourages compulsory retirement Enforces shorter workweek Exclusive unionism Occupational licensing WCA-19

20. Wage Rate (Dollars) Quantity of Labor D S1S1 QcQc WcWc S2S2 WuWu QuQu Decrease In Supply Craft Union Model WCA-20

21. Industrial Union Model Inclusive unionism Auto and steel workers Wage Rate (Dollars) Quantity of Labor D S QcQc WcWc WuWu QuQu QeQe a b e WCA-21

22. Union Models Are unions successful? Wages 15 percent higher on average Consequences: Higher unemployment Restricted ability to demand higher wages WCA-22

23. Wage Differentials Average Annual Wages in Selected Occupations Occupation Average Annual Wages Surgeons $225,390 Petroleum engineers 127,970 Financial managers 116,970 Aircraft pilots 115,300 Law professors 107,990 Chemical engineers 94,590 Dental hygienists 68,680 Registered nurses 67,720 Police officers 55,620 Electricians 51,810 Travel agents 33,950 Barbers 27,930 Recreation workers 25,270 Retail salespersons 25,000 Teacher aides 24,880 Fast-food cooks 18,540 WCA-23

24. Wage Differentials SaSa DaDa SbSb DbDb ScSc DcDc SdSd DdDd W W W W Q QQ Q 0 0 0 0 WaWa WbWb WcWc WdWd QaQa QbQb QcQc QdQd (a) (b) (c) (d) WCA-24

25. Wage Differentials Differences across occupations What explains wage differentials? Marginal revenue productivity Noncompeting groups Ability Education and training Compensating differences WCA-25

26. Wage Differentials WCA-26

27. The Minimum Wage Controversy Case against minimum wage Case for minimum wage State and locally set rates Evidence and conclusions WCA-27