wage determination

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  • Chapter 15Wage DeterminationCopyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

    Copyright 2015 by McGraw-Hill Education. All rights reserved.

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    WagesPrice paid for laborDirect pay plus fringe benefits Wage rateNominal wageReal wageGeneral level of wagesLabor, Wages, and EarningsLO1

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    Global PerspectiveLO1

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    Role of ProductivityLabor demand depends on productivityU.S. labor is highly productivePlentiful capitalAccess to abundant natural resourcesAdvanced technologyLabor qualityOther factorsLO1

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    Real Wages and ProductivityLong-run trend of real wages in the U.S.

    Real Wage Rate (Dollars)Quantity of LaborD1900S1900D1950D2000D2020S1950S2000S2020LO1

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    Real Wages and ProductivityLO1

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    Competitive Labor MarketMarket demand for laborSum of firm demandExample: carpentersMarket supply for laborUpward slopingCompetition among industriesLabor market equilibriumMRP = MRC ruleLO2

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    ($10)WC($10)WCQC(1000)00d=mrpqC(5)s=MRCCompetitive Labor MarketLO2D=MRP( mrps)Sebac

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    Monopsony ModelEmployer has buying powerCharacteristicsSingle buyerLabor immobileFirm is a wage makerUpsloping labor supply to firmMRC higher than wage rateEquilibrium LO3

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    Examples of monopsony powerMonopsony ModelWage Rate (Dollars)Quantity of Labor0SMRPMRCcbaWcWmQmQcLO3

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    Monopsony PowerMaximize profit by hiring smaller number of workersExamples of monopsony powerNursesProfessional AthletesTeachersThree union modelsLO3

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    Demand Enhancement ModelUnion modelIncrease demand for union labor by altering price of other inputsWage Rate (Dollars)Quantity of LaborWuQcQuWcD1D2SIncreaseIn DemandLO4

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    Craft Union ModelEffectively reduce supply of laborRestrict immigrationReduce child laborCompulsory retirementShorter workweekExclusive unionismOccupational licensingLO4

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    Wage Rate (Dollars)Quantity of LaborDS1QcWcS2WuQuDecreaseIn SupplyCraft Union ModelLO4

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    Industrial Union ModelInclusive unionismAuto and steel workersWage Rate (Dollars)Quantity of LaborDSQcWcWuQuQeabeLO4

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    Wage Increases and Job LossAre unions successful?Wages 15% higher on averageConsequences:Higher unemploymentRestricted ability to demand higher wagesLO4

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    Bilateral Monopoly ModelMonopsony and inclusive unionismSingle buyer and sellerNot uncommonIndeterminate outcomeDesirability LO5

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    Bilateral Monopoly ModelLO5Wage Rate (Dollars)Quantity of LaborD=MRPSQcWcWuQu=QmMRCWma

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    The Minimum Wage ControversyCase against minimum wageCase for minimum wageState and locally set ratesEvidence and conclusionsLO6

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    Wage DifferentialsLO7

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    SaDaSbDbScDcSdDdWWWWQQQQ0000WaWbWcWdQaQbQcQd(a)(b)(c)(d)LO7Wage Differentials

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    Wage DifferentialsDifferences across occupationsWhat explains wage differentials?Marginal revenue productivityNoncompeting groupsAbilityEducation and trainingCompensating differencesLO7

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    Wage DifferentialsLO7

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    Wage DifferentialsWorkers prevented from moving to higher paying jobsMarket imperfectionsLack of job informationGeographic immobilityUnions and government restraintsDiscriminationLO7

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    Pay for PerformanceThe principal-agent problem Incentive pay planPiece ratesCommissions or royaltiesBonuses, stock options, and profit sharingEfficiency wagesNegative side-effectsLO8

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    Are CEOs Overpaid?U.S. CEO salaries relatively highGood decisions enhance productivityLimited supply, high MRPIncentive to raise productivity at all levelsHigh salary bias by board members Unsettled issue

    Copyright 2015 by McGraw-Hill Education. All rights reserved.

    In this chapter we examine how wages are determined in competitive markets and imperfectly competitive markets. We look at factors that impact wages, including the influence of unions. We will analyze wage differences with union models including craft unions and industrial unions. We will discuss reasons for wage differentials across jobs and analyze the effects of the minimum wage on the labor market.

    *The term labor is used to refer to virtually any type of worker: blue-collar, white-collar, hourly, salaried, professional, etc. Wages, the price paid for labor, include not only direct money payments but also fringe benefits like vacations and health insurance. A nominal wage is the amount of money received per hour, day, or year. A real wage is the quantity of goods and services a worker can obtain with nominal wages or the purchasing power of nominal wages. Wage rates differ greatly among nations, regions, occupations, and individuals.The data shown here indicate that hourly compensation in the United States is not as high as in some European countries but is higher than other nations. Generally speaking, the level of real wages in the United States is relatively high as in most other industrially advanced economies. In those nations, the demand for labor is relatively large compared to the supply of labor.The demand for labor, like other resources, depends on its productivity. The greater the productivity of labor, the greater is the demand for it. And if the supply of labor is relatively fixed, that means the average level of real wages will be higher. The U.S. and other advanced economies benefit from highly productive labor. This is due to the plentiful capital available in these nations, access to abundant natural resources, advanced technology, the quality of the labor, and other less obvious factors such as a social and political environment that emphasizes production and productivity.The long-run trend of average real wages in the U.S. has been to increase, in spite of increases in the labor force. This figure demonstrates the trend in the supply and demand of labor since 1900.This graph illustrates productivity and real hourly wages from 1960 2011.Because wage rates vary greatly by occupation, it is useful to look at the factors that determine the wage rate paid for a specific type of labor under different conditions. We begin by examining labor supply and demand in a purely competitive labor market. The market demand for labor is determined by the horizontal sum of the labor demand curves of the individual firms. The market supply for labor is illustrated by an upward-sloping supply curve, indicating that employers must pay higher wage rates to obtain more workers. The labor market equilibrium is determined by the intersection of the market labor demand curve and the market labor supply curve.These graphs demonstrate the labor supply and labor demand in a purely competitive labor market and a single competitive firm. In an individual firm, the labor supply curve is represented by a horizontal line because it is perfectly elastic. The labor demand curve for the individual firm is downward sloping reflecting the fact that to attract more workers, the firm must pay more. The firm will maximize profits by hiring workers up to where MRP = MRC.In a monopsony market, there is only one buyer for labor. The workers who provide the type of labor needed have few employment options other than working for the monopsony, maybe because they are geographically immobile or their skills are not transferable to other jobs. This makes the firm a wage maker, meaning that the wage rate it must pay varies directly with the number of workers available. In this case, the firms labor supply curve will be upward sloping and the MRC will be higher than the wage rate. To maximize profit, the monopsonist will employ the quantity of labor at which MRC and MRP are equal.In this graph of the monopsony labor market, the upsloping labor supply curve of the monopsonist is shown. MRC, the labor supply curve of the monopsonist, lies above the labor supply curve of the competitive market. The monopsonist will hire Qm workers and only pays wage rate Wm, as compared to the competitive wage Wc.The monopsonist will maximize profits by employing a smaller number of workers and paying a lower wage than the competitive market. Society

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