Wage

Determination

HELP

WANTED

28C H A P T E R

Wages Defined...Wages - - Salary - - Earnings

Wage RateNominal WagesReal Wages

International differences...

LABOR, WAGES, AND EARNINGS

0 5 10 15 20 25GermanyDenmark

SwitzerlandUnited States

JapanSweden

United KingdomFrance

CanadaItaly

AustraliaKorea

TaiwanMexico

GLOBAL PERSPECTIVEHourly Wages of Production Workers,Selected Nations

Source: U.S. Bureau of Labor Statistics, 2003

Hourly Pay in U.S. Dollars, 2001

GENERAL LEVEL OF WAGES

Role of Productivity•Plentiful Capital•Access to Abundant Natural Resources

•Advanced Technology

•Labor Quality

REAL WAGES ANDPRODUCTIVITY

Growth in real income (earnings) Growth in output per worker-hour

Can only grow at

about the same rate!

PURELY COMPETITIVELABOR MARKET

Purely competitive labor market:Many Firms

Numerous Qualified Workers

“Wage Taker” Behavior

Non-LaborCosts

LaborCosts

PURELY COMPETITIVE LABORMARKET EQUILIBRIUM

Labor Market

S

D = MRP( mrp’s)

Wc

(1000)

Individual Firm

S = MRC

d = mrp

Wc

Quantity of Labor

Wa

ge

Ra

te (

do

llars

)

Quantity of Labor

($10)

(5)

$10 $10 $10 $10 $10 $10

IncludesNormalProfit

Non-LaborCosts

LaborCosts

IncludesNormalProfit

Labor Market

S

D = MRP( mrp’s)

Wc

(1000)

Individual Firm

S = MRC

d = mrp

Wc

Quantity of Labor

Wa

ge

Ra

te (

do

llars

)

Quantity of Labor

($10)

(5)

$10 $10 $10 $10 $10 $10

Marginal ResourceCost (MRC) will be

constant and equal toresource price(the wage rate)

PURELY COMPETITIVE LABORMARKET EQUILIBRIUM

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

Wa

ge

Ra

te (

do

llars

)S

Quantity of Labor

MONOPSONISTICLABOR MARKET

In monopsonyMRC lies above

the supply curve.

Wa

ge

Ra

te (

do

llars

)

MRP

S

Wm

Quantity of Labor

MRC

Qm

MONOPSONISTICLABOR MARKET

MRP = MRC

Qm units oflabor hired

Wa

ge

Ra

te (

do

llars

)

MRP

S

Wm

Quantity of Labor

MRC

Wc

Qm Qc

The competitivesolution would

result in a higherwage and greater

employment.

MONOPSONISTICLABOR MARKET

Wa

ge

Ra

te (

do

llars

)

MRP

S

Wm

Quantity of Labor

MRC

Wc

Qm Qc

The competitivesolution would

result in a higherwage and greater

employment

MONOPSONISTICLABOR MARKET

Monopsonists maximizeprofits by hiring a smaller

number of workers andthereby paying a less-than-

competitive wage rate.

Wag

e R

ate

(do

llar

s)

D1

S

Quantity of Labor

Wc

Qc

THREE UNION MODELSDemand-Enhancement Model

Wu

Qu

Wag

e R

ate

(do

llar

s)

D1

S

Quantity of Labor

Wc

Qc

D2

...by increasingproduct demand

THREE UNION MODELSDemand-Enhancement Model

Wu

Qu

Wag

e R

ate

(do

llar

s)

D1

S

Quantity of Labor

Wc

Qc

D2

...by increasingproduct demand...by increasingproductivity

THREE UNION MODELSDemand-Enhancement Model

Wu

Qu

Wag

e R

ate

(do

llar

s)

D1

S

Quantity of Labor

Wc

Qc

D2

...by increasingproduct demand...by increasingproductivity...by increasingthe price ofsubstitutes

THREE UNION MODELSDemand-Enhancement Model

Wag

e R

ate

(do

llar

s)

D

Quantity of Labor

Wc

Qc

THREE UNION MODELSExclusive or Craft Model

S1

Wu

Wag

e R

ate

(do

llar

s)

D

Quantity of Labor

Wc

Qc

THREE UNION MODELSExclusive or Craft Model

Qu

S1

...restrictive membership policiesS2

Wu

Wag

e R

ate

(do

llar

s)

D

Quantity of Labor

Wc

Qc

THREE UNION MODELSExclusive or Craft Model

Qu

S1

...restrictive membership policies...restricting labor supply of the economy as a whole

S2

Wu

Wag

e R

ate

(do

llar

s)

D

Quantity of Labor

Wc

Qc

THREE UNION MODELSExclusive or Craft Model

Qu

S1

...restrictive membership policies...restricting labor supply of the economy as a whole…occupational licensing

S2

Wag

e R

ate

(do

llar

s)

Quantity of Labor

Wc

Qc

THREE UNION MODELSInclusive or Industrial Model

D

S

...by organizing virtually all workers and thereby control of the supply curve for labor causing…

Wu

Wag

e R

ate

(do

llar

s)

D

Quantity of Labor

Wc

Qc

THREE UNION MODELSInclusive or Industrial Model

Qu

D

...by organizing virtually all workers and thereby control of the supply curve for labor causing…

S

Qe

WAGE INCREASESAND UNEMPLOYMENT• Union members receive about 15% higher wages

• Negative impact on level of employmentNegative

unemployment effect reduced by:

GrowthElasticity

BILATERAL MONOPOLY MODELMonopsonist & Union SeekDifferent Wage Rates...

…economic theorycannot

determine the actual

outcome.

MRC

Wu

Wag

e R

ate

(do

llar

s)

D

Quantity of Labor

Wc

Qc

D=MRP

S

Qu=Qm

Wm

MRC

Wu

Wag

e R

ate

(do

llar

s)

D

Quantity of Labor

Wc

Qc

BILATERAL MONOPOLY MODELMonopsonist & Union SeekDifferent Wage Rates...

D=MRP

S

…economic theorycannot

determine the actual

outcome.

Qu=Qm

Wm

Desirability of Bilateral Monopoly

MINIMUM WAGECONTROVERSY

•Case Against Minimum Wage•Case For Minimum

Wage•Evidence and Conclusions

WAGE DIFFERENTIALSMarginal Revenue Productivity

Noncompeting Groups•Ability•Education and Training

•Investment in Human Capital

WAGE DIFFERENTIALSCompensating Differences

•Nonmonetary Differences

Market Imperfections

•Lack of Job Information

•Geographical Immobility

•Unions & Government Restraints

•Discrimination

PAY FOR PERFORMANCE

The Principal-Agent Problem

Incentive Pay Plan• Piece Rates• Commissions or

Royalties• Bonuses, Stock

Options, & Profit Sharing

• Efficiency Wages

PAY FOR PERFORMANCENegative 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

wage ratenominal wagereal wagepurely competitive labor marketmonopsonyexclusive unionismoccupational licensinginclusive unionism

bilateral monopolyminimum wagewage differentialsmarginal revenue productivitynoncompeting groupsinvestment in human capitalcompensating differences incentive pay plan

ENDBACKCopyright McGraw-Hill/Irwin, Inc. 2005

Next:

Rent, Interest, and Profit

Chapter 29