Labor markets and wage determination

Labor markets and wage determination

LABOR, WAGES, AND EARNINGS Wages Defined... Wages - - Salary - - Earnings Wage Rate Nominal Wages Real Wages International differences...

GLOBAL PERSPECTIVE Hourly Wages of Production Workers, Selected Nations Hourly Pay in U.S. Dollars, 2001 0 Germany 5 10 15 20 25 Denmark Switzerland United States Japan Sweden United Kingdom France Canada Italy Australia Korea Taiwan Mexico Source: U.S. Bureau of Labor Statistics, 2003

GENERAL LEVEL OF WAGES Role of Productivity Plentiful Capital Access to Abundant Natural Resources Advanced Technology Labor Quality

REAL WAGES AND PRODUCTIVITY Growth in real income (earnings) Growth in output per worker-hour Can only grow at about the same rate!

PURELY COMPETITIVE LABOR MARKET Purely competitive labor market: Many Firms Numerous Qualified Workers Wage Taker Behavior

PURELY COMPETITIVE LABOR MARKET EQUILIBRIUM S $10 S = MRC ($10) D = MRP ( mrp s) Labor Costs d = mrp (marginal revenue product) (1000) Labor Market (5) Individual Firm

PURELY COMPETITIVE LABOR MARKET EQUILIBRIUM Marginal Resource Cost (MRC) will Nonbe Labor constant Costs $10 and equal to resource price (the wage rate) S D = MRP ( mrp s) Labor Costs Includes Normal Profit S = MRC d = mrp ($10) (1000) Labor Market (5) Individual Firm

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

MONOPSONISTIC LABOR MARKET S In monopsony MRC lies above the supply curve.

MONOPSONISTIC LABOR MARKET MRC S MRP = MRC W m MRP Q m units of labor hired Q m

MONOPSONISTIC LABOR MARKET MRC S W m The competitive solution would result in a higher wage and greater employment. MRP Q m Q c

MONOPSONISTIC LABOR MARKET W m MRC S Monopsonists maximize profits by hiring a smaller number of workers and thereby paying a less-than- competitive wage rate. The competitive solution would result in a higher wage and greater employment MRP Q m Q c

THREE UNION MODELS Demand-Enhancement Model S D 1 Q c

THREE UNION MODELS Demand-Enhancement Model...by increasing product demand S W u D 2 D 1 Q c Q u

THREE UNION MODELS Demand-Enhancement Model S...by increasing product demand...by increasing productivity W u D 1 D 2 Q c Q u

THREE UNION MODELS Demand-Enhancement Model S...by increasing product demand...by increasing productivity...by increasing the price of substitutes W u D 1 D 2 Q c Q u

THREE UNION MODELS Exclusive or Craft Model S 1 D Q c

THREE UNION MODELS Exclusive or Craft Model S 2 S 1...restrictive membership policies W u D Q u Q c

THREE UNION MODELS Exclusive or Craft Model S 2 S 1...restrictive membership policies...restricting labor supply of the economy as a whole W u D Q u Q c

THREE UNION MODELS Exclusive or Craft Model S 2 S 1...restrictive membership policies...restricting labor supply of the economy as a whole occupational licensing W u D Q u Q c

THREE UNION MODELS Inclusive or Industrial Model...by organizing virtually all workers and thereby control of the supply curve for labor causing S D Q c

THREE UNION MODELS Inclusive or Industrial Model...by organizing virtually all workers and thereby control of the supply curve for labor causing S W u D Q u Q c Q e

WAGE INCREASES AND UNEMPLOYMENT Union members receive about 15% higher wages Negative impact on level of employment Negative unemployment effect reduced by: Growth Elasticity

BILATERAL MONOPOLY MODEL Monopsonist & Union Seek Different Wage Rates... W u W m MRC S economic theory cannot determine the actual outcome. D D=MRP Q u =Q m Q c

BILATERAL MONOPOLY MODEL Monopsonist & Union Seek Different Wage Rates... W u W m MRC S economic theory cannot determine the actual outcome. Q u =Q m Q c D D=MRP Desirability of Bilateral Monopoly

MINIMUM WAGE CONTROVERSY Case Against Minimum Wage Case For Minimum Wage Evidence and Conclusions

WAGE DIFFERENTIALS Marginal Revenue Productivity Noncompeting Groups Ability Education and Training Investment in Human Capital

WAGE DIFFERENTIALS Compensating 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 PERFORMANCE Negative 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