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Wage
Determination
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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
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Rent, Interest, and Profit
Chapter 29