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Page 1: 16 McGraw-Hill/IrwinCopyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. Wage Determination

16

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

Wage Determination

Page 2: 16 McGraw-Hill/IrwinCopyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. Wage Determination

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

Page 3: 16 McGraw-Hill/IrwinCopyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. Wage Determination

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

• Other factors

LO1

Page 4: 16 McGraw-Hill/IrwinCopyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. Wage Determination

Real Wages and Productivity

• Long-run trend of average real wages in the U.S.

Rea

l Wag

e R

ate

(Do

llars

)

Quantity of Labor

D1900

S1900

D1950

D2000D2020

S1950

S2000

S2020

LO1

Page 5: 16 McGraw-Hill/IrwinCopyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. Wage Determination

Real Wages and Productivity

LO1

Page 6: 16 McGraw-Hill/IrwinCopyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. Wage Determination

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

Page 7: 16 McGraw-Hill/IrwinCopyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. Wage Determination

($10)WC

($10)WC

Wag

e R

ate

(Do

llar

s)

Labor Market

Quantity of Labor

Wag

e R

ate

(Do

llar

s)

Individual Firm

Quantity of Labor

QC

(1000)

0 0

d=mrp

qC

(5)

s=MRC

Competitive Labor Market

LO2

D=MRP(∑ mrp’s)

S

e b

a

c

Page 8: 16 McGraw-Hill/IrwinCopyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. Wage Determination

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

Page 9: 16 McGraw-Hill/IrwinCopyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. Wage Determination

• Examples of monopsony power

Monopsony Model

Wa

ge

Ra

te (

Do

llars

)

Quantity of Labor

0

S

MRP

MRC

c

b

aWc

Wm

Qm Qc

LO3

Page 10: 16 McGraw-Hill/IrwinCopyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. Wage Determination

Monopsony Power

• Maximize profit by hiring smaller number of workers

• Examples of monopsony power

• Nurses

• Professional Athletes

• Teachers

• Three union models

LO3

Page 11: 16 McGraw-Hill/IrwinCopyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. Wage Determination

Demand Enhancement Model

• Union model• Increase product demand• Alter price of other inputs

Wa

ge

Ra

te (

Do

llars

)

Quantity of Labor

Wu

Qc Qu

Wc

D1

D2

S

IncreaseIn Demand

LO4

Page 12: 16 McGraw-Hill/IrwinCopyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. Wage Determination

Wa

ge

Ra

te (

Do

llars

)

Quantity of Labor

D

S1

Qc

Wc

S2

Wu

Qu

DecreaseIn Supply

Craft Union Model

LO4

Page 13: 16 McGraw-Hill/IrwinCopyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. Wage Determination

Industrial Union Model

• Inclusive unionism• Auto and steel workers

Wa

ge

Ra

te (

Do

llars

)

Quantity of Labor

D

S

Qc

Wc

Wu

Qu Qe

a be

LO4

Page 14: 16 McGraw-Hill/IrwinCopyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. Wage Determination

Bilateral Monopoly Model

• Monopsony and inclusive unionism

• Single buyer and seller

• Not uncommon

• Indeterminate outcome

• Desirability

LO4

Page 15: 16 McGraw-Hill/IrwinCopyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. Wage Determination

Bilateral Monopoly Model

LO4

Wa

ge

Ra

te (

Do

llars

)

Quantity of Labor

D=MRP

S

Qc

Wc

Wu

Qu=Qm

MRC

Wm

a

Page 16: 16 McGraw-Hill/IrwinCopyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. Wage Determination

The Minimum Wage Controversy

• Case against minimum wage

• Case for minimum wage

• State and locally set rates

• Evidence and conclusions

LO5

Page 17: 16 McGraw-Hill/IrwinCopyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. Wage Determination

• Differences across occupations

• What explains wage differentials?

• Marginal revenue productivity

• Noncompeting groups

• Ability

• Education and training

• Compensating differences

LO5

Wage Differentials

Page 18: 16 McGraw-Hill/IrwinCopyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. Wage Determination

Wage Differentials

LO5

Page 19: 16 McGraw-Hill/IrwinCopyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. Wage Determination

Wage Differentials

• Workers prevented from moving to higher paying jobs

• Market imperfections

• Lack of job information

• Geographic immobility

• Unions and government restraints

• Discrimination

LO5

Page 20: 16 McGraw-Hill/IrwinCopyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. Wage Determination

Pay for Performance

• The principal-agent problem • Incentive pay plan

• Piece rates• Commissions or royalties• Bonuses, stock options, and profit

sharing• Efficiency wages

• Negative side-effects

LO6


Economic Growth 8 McGraw-Hill/IrwinCopyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved

Chapter 4 McGraw-Hill/IrwinCopyright © 2010 The McGraw-Hill Companies, Inc. All rights reserved

Chapter 8 McGraw-Hill/IrwinCopyright © 2010 The McGraw-Hill Companies, Inc. All rights reserved

Chapter 15 McGraw-Hill/IrwinCopyright © 2010 The McGraw-Hill Companies, Inc. All rights reserved

Chapter 7 Trade McGraw-Hill/IrwinCopyright © 2009 by The McGraw-Hill Companies, Inc. All Rights Reserved

Chapter 02 Professional Standards McGraw-Hill/IrwinCopyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved

Chapter 5 McGraw-Hill/IrwinCopyright © 2010 The McGraw-Hill Companies, Inc. All rights reserved

Elasticity 6 McGraw-Hill/IrwinCopyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved

Chapter 07 Internal Control McGraw-Hill/IrwinCopyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved

Chapter © 2008The McGraw-Hill Companies, Inc. All rights reserved. Values, Attitudes, and Job Satisfaction 6 McGraw-Hill/IrwinCopyright © 2008 by The McGraw-Hill

12 Cost Analysis McGraw-Hill/IrwinCopyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved

Computer Hardware Chapter 3 McGraw-Hill/IrwinCopyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved

Chapter 03 Professional Ethics McGraw-Hill/IrwinCopyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved

Chapter Interest Rates McGraw-Hill/IrwinCopyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. 9

Chapter 7 McGraw-Hill/IrwinCopyright © 2010 The McGraw-Hill Companies, Inc. All rights reserved

McGraw-Hill/IrwinCopyright © 2009 by The McGraw-Hill Companies, Inc. All Rights Reserved. Confidence Intervals Chapter 8

Chapter 8 Costs McGraw-Hill/IrwinCopyright © 2009 by The McGraw-Hill Companies, Inc. All Rights Reserved

Chapter 16 McGraw-Hill/IrwinCopyright © 2010 The McGraw-Hill Companies, Inc. All rights reserved

Chapter One Managers and Managing McGraw-Hill/IrwinCopyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved

Chapter 10 McGraw-Hill/IrwinCopyright © 2010 The McGraw-Hill Companies, Inc. All rights reserved

Data Resource Management Chapter 5 McGraw-Hill/IrwinCopyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved

Copyright © 2006. The McGraw-Hill Companies, Inc.McGraw-Hill/IrwinCopyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin Flexible Budgets and

Chapter 17 Auditors’ Reports McGraw-Hill/IrwinCopyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved

McGraw-Hill/IrwinCopyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved. SAMPLING Chapter 14

McGraw-Hill/IrwinCopyright ©2008 The McGraw-Hill Companies, Inc. All rights reserved. Fundamentals of Variance Analysis Chapter 16

Chapter 12. LABOUR McGraw-Hill/IrwinCopyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 12

McGraw-Hill/Irwin © 2007 The McGraw-Hill Companies, Inc., All Rights Reserved. Chapter 8 Property Dispositions McGraw-Hill/IrwinCopyright © 2009 by The

Chapter 7. PRODUCTION McGraw-Hill/IrwinCopyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 7

Competing in Foreign Markets McGraw-Hill/IrwinCopyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved

Chapter 3 McGraw-Hill/IrwinCopyright © 2010 The McGraw-Hill Companies, Inc. All rights reserved

McGraw-Hill/IrwinCopyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved. SURVEYS Chapter 10

Computer Software Chapter 4 McGraw-Hill/IrwinCopyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved

Chapter © 2008The McGraw-Hill Companies, Inc. All rights reserved. Foundations of Motivation 8 McGraw-Hill/IrwinCopyright © 2008 by The McGraw-Hill Companies,

Chapter Mutual Funds McGraw-Hill/IrwinCopyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. 4

Chapter 4 Risk Assessment McGraw-Hill/IrwinCopyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved