13

Wage Determination

McGraw-Hill/Irwin

Copyright 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

Labor, Wages, and Earnings

Wages
Price paid for labor
Direct pay plus fringe benefits
Wage rate
Nominal wage
Real wage
General level of wages
LO1

13-2

Role of Productivity

Labor demand depends on

LO1

productivity
U.S. labor is highly productive
Plentiful capital
Access to abundant natural
resources
Advanced technology
Labor quality
Other factors
13-3

Real Wages and Productivity

Long-run trend of average real

Real Wage Rate (Dollars)

wages in the U.S.

S2020

S2000
S1900

S1950

D1950

D2000

D2020

D1900

Quantity of Labor

LO1

13-4

Real Wages and Productivity

LO1

13-5

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

Competitive Labor Market

Labor Market

Individual Firm
a

($10)
WC

($10)
WC

D=MRP
( mrps)
0

QC
(1000)

Quantity of Labor

LO2

Wage Rate (Dollars)

Wage Rate (Dollars)

s=MRC

d=mrp

qC
(5)

Quantity of Labor

13-7

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

Monopsony Model

Examples of monopsony power

Wage Rate (Dollars)

MRC

b
a

Wc
Wm

MRP

Qm Qc

Quantity of Labor

LO3

13-9

Monopsony Power

Maximize profit by hiring smaller

LO3

number of workers
Examples of monopsony power
Nurses
Professional Athletes
Teachers
Three union models

13-10

Demand Enhancement Model

Wage Rate (Dollars)

Union model
Increase product demand
Alter price of other inputs
S
Increase
In Demand
Wu
Wc

D2
D1
Qc

Qu

Quantity of Labor
LO4

13-11

Craft Union Model

Wage Rate (Dollars)

S2

S1

Decrease
In Supply

Wu
Wc

D
Qu

Qc

Quantity of Labor
LO4

13-12

Industrial Union Model

Inclusive unionism
Auto and steel workers
Wage Rate (Dollars)

Wu

b
e

Wc

D
Qu

Qc

Qe

Quantity of Labor
LO4

13-13

Bilateral Monopoly Model

Monopsony and inclusive unionism

Single buyer and seller
Not uncommon
Indeterminate outcome
Desirability

LO4

13-14

Bilateral Monopoly Model

Wage Rate (Dollars)

MRC

Wu
a

Wc
Wm

D=MRP
Qu=Qm

Qc

Quantity of Labor

LO4

13-15

The Minimum Wage Controversy

Case against minimum wage

Case for minimum wage
State and locally set rates
Evidence and conclusions

LO5

13-16

Wage Differentials

Differences across occupations

What explains wage differentials?
Marginal revenue productivity
Noncompeting groups
Ability
Education and training
Compensating differences
LO5

13-17

Wage Differentials

LO5

13-18

Wage Differentials

Workers prevented from moving to

LO5

higher paying jobs

Market imperfections
Lack of job information
Geographic immobility
Unions and government restraints
Discrimination

13-19

Pay for Performance

The principal-agent problem

Incentive pay plan
Piece rates
Commissions or royalties
Bonuses, stock options, and profit

LO6

sharing
Efficiency wages
Negative side-effects
13-20