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Wage Determination

15. C H A P T E R. HELP WANTED. Wage Determination. LABOR, WAGES, AND EARNINGS. Wages Defined. Wages - - Salary - - Earnings. Wage Rate Nominal Wages Real Wages. International differences. GLOBAL PERSPECTIVE. Hourly Wages of Production Workers, Selected Nations.

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Wage Determination

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  1. 15 C H A P T E R HELP WANTED Wage Determination

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

  3. GLOBAL PERSPECTIVE Hourly Wages of Production Workers, Selected Nations Hourly Pay in U.S. Dollars, 2001 0 5 10 15 20 25 Germany Denmark Switzerland United States Japan Sweden United Kingdom France Canada Italy Australia Korea Taiwan Mexico Source: U.S. Bureau of Labor Statistics, 2003

  4. GENERAL LEVEL OF WAGES • Role of Productivity • Plentiful Capital • Access to Abundant Natural Resources • Advanced Technology • Labor Quality • Other Factors

  5. 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 Purely competitive labor market: Many Firms Numerous Qualified Workers “Wage Taker” Behavior Market Demand for Labor Market Supply of Labor

  7. Non- Labor Costs Wage Rate (dollars) Quantity of Labor Quantity of Labor PURELY COMPETITIVE LABOR MARKET EQUILIBRIUM S Includes Normal Profit S = MRC Wc ($10) $10 $10 $10 $10 $10 $10 Wc Labor Costs D = MRP ( mrp’s) d = mrp (1000) (5) Individual Firm Labor Market

  8. Marginal Resource Cost (MRC)will be constant and equal to resource price (the wage rate). Non- Labor Costs Wage Rate (dollars) Quantity of Labor Quantity of Labor PURELY COMPETITIVE LABOR MARKET EQUILIBRIUM S Includes Normal Profit S = MRC Wc ($10) $10 $10 $10 $10 $10 $10 Wc Labor Costs D = MRP ( mrp’s) d = mrp (1000) (5) Individual Firm Labor Market

  9. 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. MONOPSONISTICLABOR MARKET S In monopsony MRC lies above the supply curve. Wage Rate (dollars) Quantity of Labor

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

  12. MONOPSONISTICLABOR 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. Monopsonists maximize profits by hiring a smaller number of workers and thereby paying a less-than- competitive wage rate. MONOPSONISTICLABOR 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

  14. THREE UNION MODELS Demand-Enhancement Model S 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 ...by increasing 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 ...by increasing productivity ...by increasing 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 S1 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 Qc Qu 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 Qc Qu 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 Qc Qu 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 Qc Qu Qe 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. MRC S Wage Rate (dollars) Wu Wc Wm D D=MRP Qc Qu=Qm Quantity of Labor BILATERAL MONOPOLY MODEL Monopsonist & Union Seek Different Wage Rates... …economic theory cannot determine the actual outcome.

  26. BILATERAL MONOPOLY MODEL Monopsonist & Union Seek Different Wage Rates... MRC S …economic theory cannot determine the actual outcome. Wage Rate (dollars) Wu Wc Wm D D=MRP Desirability of Bilateral Monopoly Qc Qu=Qm 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. 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. 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

  32. 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 investment in human capital compensating differences incentive pay plan KEY TERMS Copyright McGraw-Hill/Irwin, Inc. 2005 BACK END

  33. Next: Rent, Interest, and Profit Chapter 16

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