13 Wage Determination

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1 13 Wage Determination

2 Labor, Wages,and Earnings Wages Price paid for labor Direct pay plus fringe benefits Wage rate Nominal wage Real wage General level of wages LO1 13-2

3 Global Perspective LO1 13-3

4 Role of Productivity Labor demand depends on productivity U.S. labor is highly productive Plentiful capital Access to abundant natural resources Advanced technology Labor quality Other factors LO1 13-4

5 Real Wages and Productivity Long-run trend of average real wages in the U.S. Real Wage Rate (Dollars) S 1900 D 1900 S 1950 D 1950 S 2000 D 2000 S 2020 D 2020 Quantity of Labor LO1 13-5

6 Real Wages and Productivity LO1 13-6

7 Competitive Labor Market Market demand for labor Sum of firm demand Example: carpenters Market supply for labor Upward sloping Competition among industries Labor market equilibrium MRP = MRC rule LO2 13-7

8 Competitive Labor Market Labor Market Individual Firm Wage Rate (Dollars) ($10) W C Quantity of Labor D=MRP ( mrp s) Wage Rate (Dollars) 0 0 Q C (1000) S ($10) W C a e b c q C (5) d=mrp Quantity of Labor s=mrc LO2 13-8

9 Monopsony Model Employer has buying power Characteristics Single buyer Labor immobile Firm wage maker Firm labor supply is upward sloping MRC higher than wage rate Equilibrium LO3 13-9

10 Monopsony Model Examples of monopsony power MRC S Wage Rate (Dollars) W c W m b c a MRP 0 Q m Q c Quantity of Labor LO

11 Monopsony Model Examples of monopsony power MRC S Wage Rate (Dollars) W c W m b c a MRP 0 Q m Q c Quantity of Labor LO

12 Monopsony Power Maximize profit by hiring smaller number of workers Examples of monopsony power Nurses Professional Athletes Teachers Three union models LO

13 Demand Enhancement Model Union model Increase product demand Alter price of other inputs Wage Rate (Dollars) W u W c S Increase In Demand D 2 D 1 Q c Quantity of Labor LO Q u

14 Craft Union Model Effectively reduce supply of labor Restrict immigration Reduce child labor Compulsory retirement Shorter workweek Exclusive unionism Occupational licensing LO

15 Craft Union Model Wage Rate (Dollars) W u W c S 2 S 1 Decrease In Supply D Q u Q c Quantity of Labor LO

16 Industrial Union Model Inclusive unionism Auto and steel workers S Wage Rate (Dollars) W u W c a b e D Q u Q c Q e Quantity of Labor LO

17 Industrial Union Model Inclusive unionism Auto and steel workers S Wage Rate (Dollars) W u W c a b e D Q u Q c Q e Quantity of Labor LO

18 Union Models Are unions successful? Wages 15% higher on average Consequences: Higher unemployment Restricted ability to demand higher wages LO

19 Bilateral Monopoly Model Monopsony and inclusive unionism Single buyer and seller Not uncommon Indeterminate outcome Desirability LO

20 Bilateral Monopoly Model MRC S Wage Rate (Dollars) W u W c W m a D=MRP Q u =Q m Q c Quantity of Labor LO

21 Bilateral Monopoly Model MRC S Wage Rate (Dollars) W u W c W m a D=MRP Q u =Q m Q c Quantity of Labor LO

22 Bilateral Monopoly Model MRC S Wage Rate (Dollars) W u W c W m a D=MRP Q u =Q m Q c Quantity of Labor LO

23 The Minimum Wage Controversy Case against minimum wage Case for minimum wage State and locally set rates Evidence and conclusions LO

24 Wage Differentials LO

25 Wage Differentials W Sa W Sb Wa (a) Da (b) Wb Db 0 Qa Q 0 Qb Q W W Sc (c) Wc Sd (d) Wd 0 Qc Dc Q 0 Qd Dd Q LO

26 Wage Differentials W Sa W Sb Wa (a) Da (b) Wb Db 0 Qa Q 0 Qb Q W W Sc (c) Wc Sd (d) Wd 0 Qc Dc Q 0 Qd Dd Q LO

27 Wage Differentials Differences across occupations What explains wage differentials? Marginal revenue productivity Noncompeting groups Ability Education and training Compensating differences LO

28 Wage Differentials LO

29 Wage Differentials Workers prevented from moving to higher paying jobs Market imperfections Lack of job information Geographic immobility Unions and government restraints Discrimination LO

30 Pay for Performance The principal-agent problem Incentive pay plan Piece rates Commissions or royalties Bonuses, stock options, and profit sharing Efficiency wages Negative side-effects LO

31 Are CEOs Overpaid? U.S. CEO salaries relatively high Good decisions enhance productivity Limited supply, high MRP Incentive to raise productivity at all levels High salary bias by board members Unsettled issue LO

LO AGENDA Tues 12/1. QOD #37: Work with benefits Wage Determination Monopsony Unions (Effect of Unions wksht) HW: Read pp Q #7,9

LO AGENDA Tues 12/1. QOD #37: Work with benefits Wage Determination Monopsony Unions (Effect of Unions wksht) HW: Read pp Q #7,9 LO1 13-1 AGENDA Tues 12/1 QOD #37: Work with benefits Wage Determination Monopsony Unions (Effect of Unions wksht) HW: Read pp 273-282 Q #7,9 10-2 QOD #37: Work with Benefits Workers are compensated by

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