1. 13 Wage Determination McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

2. Labor, Wages, and Earnings Wages Price paid for labor Direct pay plus fringe benefits Wage rate Nominal wage Real wage-purchasing power General level of wages-see p.267 LO1 13-2

3. Role of Productivity Labor demand depends on productivity U.S. labor is highly productive Plentiful capital Access to abundant natural resources Advanced technology Labor quality LO1 13-3

4. Real Wages and Productivity Long-run trend of average 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 LO1 13-4

5. Real Wages and Productivity LO1 13-5

6. 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 LO2 13-6

7. ($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 Competitive Labor Market LO2 D=MRP (∑ mrp’s) S e b a c 13-7

8. 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 LO3 13-8

9. Examples of monopsony power-see p.272 Monopsony Model Wage Rate (Dollars) Quantity of Labor 0 S MRP MRC c b a WcWc WmWm QmQm QcQc LO3 13-9

10. Monopsony Power Maximize profit by hiring smaller number of workers Examples of monopsony power-rare in the U.S. Nurses-skills not easily transferrable-small town? Professional Athletes-player drafts-teams aren’t competing to hire. Three union models LO3 13-10

11. Demand Enhancement Model Union model Increase product demand Alter price of other inputs Wage Rate (Dollars) Quantity of Labor WuWu QcQc QuQu WcWc D1D1 D2D2 S Increase In Demand LO4 13-11

12. Wage Rate (Dollars) Quantity of Labor restrictive membership, occupational licensing (plumbers, doctors) D S1S1 QcQc WcWc S2S2 WuWu QuQu Decrease In Supply Craft Union Model LO4 13-12

13. Industrial Union Model Inclusive unionism-ALL WORKERS Auto and steel workers Wage Rate (Dollars) Quantity of Labor D S QcQc WcWc WuWu QuQu QeQe a b e LO4 13-13

14. Bilateral Monopoly Model Monopsony and inclusive unionism Single buyer and seller Not uncommon Indeterminate outcome Desirability LO4 13-14

15. Bilateral Monopoly Model LO4 Wage Rate (Dollars) Quantity of Labor D=MRP S QcQc WcWc WuWu Q u =Q m MRC WmWm a 13-15

16. The Minimum Wage Controversy Case against minimum wage Case for minimum wage State and locally set rates Evidence and conclusions LO5 13-16

17. Differences across occupations What explains wage differentials? Marginal revenue productivity Noncompeting groups Ability Education and training Compensating differences LO5 Wage Differentials 13-17

18. Wage Differentials LO5 13-18

19. Wage Differentials Workers prevented from moving to higher paying jobs Market imperfections Lack of job information Geographic immobility Unions and government restraints Discrimination LO5 13-19

20. Pay for Performance The principal-agent problem-shirking v. not shirking (utility) Incentive pay plan Piece rates Commissions or royalties Bonuses, stock options, and profit sharing Efficiency wages Negative side-effects LO6 13-20