Chapter 26-Wage Determination

Presentation 1

Labor

• Broadly defined as:

• 1. Blue and white collar workers

• 2. Professionals- doctors, lawyers

• 3. Owners of small businesses

Wages

• Hourly pay, annual salaries, bonuses, commissions, royalties, and fringe benefits (vacations, health insurance, pensions)

• Wage Rate- Price paid per hour of service

Nominal v Real Wage

• Nominal Wage- the amount of money received per hour, day, or year

• Real Wage- the quantity of goods and services a worker can obtain with nominal wages---the “purchasing power” of nominal wages

Real Wages Cont’d

• Real wages depend on your nominal wage and the price of goods/services you purchase

• Ex- you receive a 5% raise in nominal wages but the price of goods goes up 3%

• *** your real wages increase by 2%

Labor Wages and Earnings

GLOBAL PERSPECTIVE

Hourly Wages of Production WorkersSelected Nations

Hourly Pay in U.S. Dollars, 2004

Source: U.S. Bureau of Labor Statistics, 2006

DenmarkGermany

SwitzerlandSweden

United KingdomFrance

United StatesAustralia

JapanCanada

ItalyKorea

TaiwanMexico

0 5 10 15 20 25 30 35

33.7532.53

30.2628.42

24.7123.89

23.1723.09

21.9021.4220.48

11.525.97

2.50

Reasons for High Productivity

• 1. large amounts of physical capital

• 2. access to abundant natural resources

• 3. advanced technology

• 4. labor quality-better health, education and training

• 5. other factors such as work environment and flexible management

Real Wages and Productivity

• Over long periods of time, productivity and real wages tend to rise together

Purely Competitive Labor Market

• 1. numerous firms compete with one another in hiring a specific type of labor

• 2. many workers with identical skills supplying the same type of labor

• 3. individual firms and workers are “wage takers”

Market Demand for Labor• To find the total or market demand curve for a

particular labor service, sum horizontally the labor demand curves (the marginal revenue product curves) of the individual firms

($10)WC

Labor Market

Quantity of Labor

QC

(1000)

0

D=MRP(∑ mrps)

S

Market Supply of Labor

• The supply curve slopes upward, indicating the employers as a group must pay higher wage rates to obtain more workers

• The higher wages are used to attract workers away from other industries and locales

Labor Market Equilibrium

• The intersection of the market labor demand curve and the market supply curve determines the equilibrium wage rate and level of employment

($10)WC

Quantity of Labor

QC

(1000)

0

D=MRP(∑ mrps)

S

Individual Firm

• The individual firm in a perfectly competitive firm maximizes profit by hiring workers to the point where Wage rate = MRP

Wag

e R

ate

(Do

llar

s)

($10)WC

Quantity of Labor

0

d=mrp

qC

(5)

s=MRC

c

Monopsony

A single employer of labor has substantial buying (hiring power) with the following characteristics:

1. Only a single buyer of a particular good

2. Labor is immobile (workers would have to move or acquire new skills)

3. The firm is a wage maker

**monopsony power can vary

Monopsony Model

Wag

e R

ate

(Do

llars

)

Quantity of Labor

0

S

MRP

MRC

c

b

aWc

Wm

Qm Qc

Examples of Monopsony Power

Monopsonistic Labor Market

W 14.1

Examples of Monopsonies

• Some markets such as:

• nurses: one hospital

• professional athletes: drafts

• public school teachers: only one school

MRC Higher than Wage Rate

• When a monopsonist pays a higher wage to attract new workers, it must pay more to current workers as well

• Ex- one worker can be hired @ $6 and a second worker can be hired for $7

• Therefore the Marginal Resource Cost of the second worker is $8…the $7 plus the $1 raise to worker #1