1. How are wages determined?

2. Why is your salary higher than mine?

Hourly Wages of Production Workers for Selected Nations

Hourly Pay in U.S. Dollars, 2005

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

35.4733.00

30.5030.40

25.6624.6323.65

29.4221.90

23.8221.05

13.566.38

2.63

Hourly Earnings By Industry, 2006

Industry Group Hourly Wage

Mining $24.13

Finance, Insurance, Real Estate 24.06

Public Administration 23.44

Transportation, Warehousing, Information, and Utilities

21.60

Manufacturing 20.67

Construction 18.29

Services 18.10

Retail Trade 13.56

Private Manufacturing Worker’s Hourly Earnings By State, 2006

State Hourly Wage

Connecticut $26.54

New Jersey 25.77

Massachusetts 25.04

New York 20.65

Pennsylvania 20.62

Ohio 19.20

Florida 18.15

Arkansas 16.42

Mississippi 14.65

What is a Market?

BUYERS SELLERS

LaborMARKETS

FIRMS WORKERS

determine Wages and Employment levelMarket is a mechanism that brings together buyers and sellersMarket is a mechanism that brings together buyers and sellers

Individual’s Labor Supply

Work hrs per week

Wag

e R

ate

400

Choose between work and leisure.Work = time spent on a paying jobLeisure = unpaid activities• Rest •Education•Household productionSubstitution effectHigher wage higher opportunity cost of leisure work more, substitute work for leisure.Income effectHigher wage higher income work less, enjoy more leisure.

Income effect dominates at very high wage rates

20 30

$20

$40

SL$100

backward bending labor supply curve

$150

= number of hours you choose to work

Total Work Hrs In the Labor Market

Wage Rate

0

$20

$40

SL$60

Market Labor Supplyat higher w:

1. Individuals are willing to work more

2. More individuals enter labor market…foregoing household production and leisure

"reservation wage“= wage high enough to make you enter labor force

Market labor supply curve SL = horizontal summation of SL curves for all individuals in a labor market.

Always upward sloping

Total Work Hrs In the Labor Market

Wage Rate

0

$20

$40

DL

$60

Labor Demand by all Firms

Downward sloping

• Demand for labor is a derived demand. – The demand for

hamburgers leads to the demand for hamburger workers.

• Lower wage rate – firms want to hire more workers

Wage and Employment Determined

Quantity of Labor Hours or Workers

Wage rate• at wage Wlow: excess

demand for labor (shortage) Q2- Q1

• at wage Whigh:excess supply of labor Q2- Q1 (surplus, unemployment)

• Equilibrium wage rate W0 and level of employment Q0 are at intersection of labor supply and demand.

S

D

Q0

W0

Wlow

Q2Q1

Whigh

COMPETITIVE LABOR MARKET

COMPETITIVE LABOR MARKET

• Large number of firms trying to hire an identical type of labor

• Numerous qualified people independently offering their services

• Neither firms nor workers have control over the market wage

• Perfect, costless information and labor mobility

Quantity of Labor Hours

Wage rate

S1

D

Q0

W1

W3

Q2Q1

W2

S2

S3

Changes in Labor SupplyOther wage rates

Wages in other occupations rise - labor supply falls

Nonwage incomeNonwage income rises - labor supply falls

Preferences for work versus leisurePreferences for work increase - labor supply increases

Nonwage aspects of jobNonwage aspects of a job improve - labor supply increases

Number of workersIncrease in number of qualified workers increases labor supply

Quantity of Labor Hours

Wage rate

S

D1

Q0

W1

D2

Q1

W2

Changes in Labor Demand

D3

W3

Product demand Higher demand for product -

increase in labor demandProductivity

Increase in productivity – increase or decrease in labor demand

Prices of other resourcesIncrease in the price of a substitute input (e.g.: machines) will increase labor demand. Increase in the price of a complement input (e.g.: fabric) will decrease labor demand.

Quantity of Labor Hours

Wage rate

• Unions increase wages/employment of their members by increasing demand for union labor (D0 to D1)

Methods:• Increase product demand•Lobby for tariffs on foreign goods

•Enhance productivity• Influence prices of related inputs

•Lobby for minimum wage hikes • raises price of substitutable

nonunion labor•Requirements for domestic content for autos sold in U.S.

S

D0

Q0

W0

D1

Q1

W1

Example:Unions and Wages

Quantity of Labor Hours

Wage rate

• Unions increase wages of their members by decreasing supply of available labor (S0 to S1)

• wage rate rises to W1 employment falls to Q1

Methods: •Reduce the number of competitors• Lobby for laws that

reduce immigration, child labor, length of the workweek.

• Occupational licensing• Limit entry into

occupation through long apprenticeships

S0

D0

Q0

W0

S1

Q1

W1

Unions and Wages

Union Membership, % of Labor Force

0

5

10

15

20

25

30

35

1880 1900 1920 1940 1960 1980 2000

Per

cen

t U

nio

n M

emb

ersh

ip

Union Wage Advantage

0

5

10

15

20

25

1983 1987 1991 1995 1999 2003

Per

cen

t U

nio

n W

age

Dif

fere

nti

al

o

Dfor wives

S of wivesS2

P

Q1Q2

P1

P2

Application to Theories of Marriage:Competitive Marriage Market (men’s view)

Quantity of wives

Price for a wife=Housework + favors + dowry, etc

Decrease in S of wives (modern China) improves women’s bargaining position

Theories of Marriage:Competitive Marriage Market (men’s view)

oDfor wives

Quantity of wives

Sof wivesPrice

Q1 Q2

P1

P2

D2Increase in D for wives (polygyny legalized ?) improves women’s bargaining position

Theories of Marriage:Competitive Marriage Market (men’s view)

oD2

Quantity of wives

Sof wivesPrice

Q2 Q1

P2

P1

Dfor wivesDecrease in D for wives (war kills men?) worsens women’s bargaining position