Ch 28 Wage Determination

•Most important price you will encounter in your lifetime will be your hourly wage rate

•It is critical to determining your economic well-being.

Wage DeterminationThis chapter explores how the supply of land, labor,

capital and entrepreneurial ability interacts with demand for those resources in order to explain how wages, rents,

interests and profits are determined.

Wage Determination

• Wages and Salaries are first in the discussion because they account for nearly 78% of national income

• Read pages 582-584 for general wage discussion

Purely Competitive Labor Market

• Many firms compete with one another in hiring specific types of labor.

• Numerous qualified workers with identical skills independently supply this type of labor.

• “Wage-taker” behavior pertains to both individual firms and individual workers

Purely Competitive Labor Market

Question:What determines

the wage in a competitive labor

market?

Purely Competitive Labor Market

Market Supply of Labor

The supply curve slopes upward because higher wages are needed to

attract more workers

Higher wages entice more workers to offer their labor services in that market. See figure 28-3b curve S.

Purely Competitive Labor MarketLabor Market Equilibrium

Determined by the intersection of the market labor demand and supply

curves

The individual firm is a wage taker because the firm employs such a small fraction of the total supply of labor it

cannot influence the wage rate.

Purely Competitive Labor Market

Labor Market EquilibriumThe individual firm finds it profitable to

hire labor up to the point at which marginal revenue product is equal to

marginal resource cost.See Figure 28-3a

Total revenue is area 0abcGreen rectangle represents total wage

cost

Lavender triangle represents non-labor cost

Monopsony Model

The situation is quite different in monopsony, a

market in which an employer of resources has monopolistic

buying (hiring) power.

Monopsony Model• There is only a single buyer of a

particular kind of labor• This type of labor is relatively

immobile, either geographically or because workers would have to acquire new skills.

• Firm is a “wage maker” in that the wage rate it must pay varies with the number of workers employed. “Only game in town”

Monopsony Model

Question:Why is the supply curve for labor upsloping?

Monopsony Model• MRC is higher than the wage rate

Paying a uniform wage to all workers means that the cost of an

extra worker – the marginal resource (labor) cost (MRC) – is the sum of that worker’s wage rate and the amount necessary to bring the wage rate of all current workers up

to the new wage level.

Monopsony ModelSee figure 28-4.

To maximize profit it will employ the quantity where MRC =MRP

It then looks at the supply curve to point c, the wage rate it will pay.

The monopsonistic employer of resources finds it profitable to restrict employment to depress wage rates and therefore costs.

Three Union Models

•Demand-Enhancement Model•Exclusive or Craft Union Model•Inclusive or Industrial Union Model

Three Union Models

• Demand-Enhancement Model – The most desirable technique for raising wage rates is to increase the demand for labor.

• An increase in the demand for labor will result in both higher wage rates and more jobs

Three Union ModelsDemand-Enhancement Model

Increase Product demand – advertising (buy the union label), political lobbying

Increase Productivity

Change Prices of Other Inputs – support increase in minimum wage

Three Union ModelsExclusive or Craft Union Model

Specific types of workers have adopted techniques designed to

restrict numbers. Craft unions are one example. They are comprised of

workers of a given skill, such as carpenters, bricklayers or plumbers.

Three Union ModelsExclusive or Craft Union Model

Occupational Licensing is another means of restricting the supply of

specific kinds of labor.

Here a group of workers in an occupation will pressure state or

municipal governments to pass a law which say individuals can only practice

their trade if they meet certain specified requirements.

Three Union ModelsInclusive or Industrial Union Model

Here the union seeks to organize all available workers. Such unions include automobile workers and steel workers.

These types of unions seek all unskilled, semiskilled, and skilled

workers in an industry as members.

Three Union ModelsWage Increases and Unemployment

Evidence suggests that union members on the average achieve a 10 to 15

percent wage advantage over nonunion workers

Unemployment effect may be reduced in two ways: Growth and Elasticity