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 firms with benefits in addition to wages and salaries. The most prominent benefit offered by many firms is health insurance. Suppose that in 2000, workers at one steel plant were paid $20 per hour and in addition received health benefits at the rate of $4 per hour. Also suppose that by 2010 workers at that plant were paid $21 per hour but received $9 in health insurance benefits. a. By what percentage did total compensation (wages plus benefits) change at this plant from 2000 to 2010? What was the approximate average annual percentage change in total compensation? b. By what percentage did wages change at this plant from 2000 to 2010? What was the approximate average annual percentage change in wages? c. If workers value a dollar of health benefits as much as they value a dollar of wages, by what total percentage will they feel that their incomes have risen over this time period? What if they only consider wages when calculating their incomes? d. Is it possible for workers to feel as though their wages are stagnating even if total compensation is rising
10-3 QOD #37: Work with Benefits a. By what percentage did total compensation (wages plus benefits) change at this plant from 2000 to 2010? What was the approximate average annual percentage change in total compensation? a. Compensation increased by 25%. The average annual percentage change was 2.5%. b. By what percentage did wages change at this plant from 2000 to 2010? What was the approximate average annual percentage change in wages? a. Wages increased by 5%. The average annual percentage change was 0.5%. c. If workers value a dollar of health benefits as much as they value a dollar of wages, by what total percentage will they feel that their incomes have risen over this time period? What if they only consider wages when calculating their incomes? a. If they consider all benefits together, they feel their incomes increased by 25%. If they only consider wages, they feel their incomes increased 5%. d. Is it possible for workers to feel as though their wages are stagnating even if total compensation is rising? a. Yes, workers may feel their wages are stagnating even when total compensation is rising, if they do not consider the value of benefits as part of their wages
LO1 13-4 Labor, Wages, and Earnings Wages Price paid for labor Direct pay plus fringe benefits Wage rate Nominal wage Real wage-purchasing power General level of wages-see p.267
LO1 13-5 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
Real Wage Rate (Dollars) LO1 13-6 Real Wages and Productivity Long-run trend of average real wages in the U.S. S 2020 S 1900 S 1950 S 2000 D 1950 D 2000 D 2020 D 1900 Quantity of Labor
Real Wages and Productivity LO1 13-7
LO2 13-8 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 Wage Rate (Dollars) Wage Rate (Dollars) 13-9 Competitive Labor Market Labor Market Individual Firm S a ($10) W C ($10) W C e b s=mrc D=MRP ( mrp s) 0 Q C 0 (1000) Quantity of Labor c q C (5) d=mrp Quantity of Labor
LO3 13-10 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
Wage Rate (Dollars) LO3 13-11 Monopsony Model Examples of monopsony power-see p.272 MRC S b W c a W m c MRP 0 Q m Q c Quantity of Labor
LO3 13-12 Monopsony Power Maximize profit by hiring smaller number of workers Examples of monopsony power-rare in the U.S. Nurses-skills not easily transferrable-small town? Professional Athletes-player drafts-teams aren t competing to hire. Three union models
Wage Rate (Dollars) Demand Enhancement Model Union model Increase product demand Alter price of other inputs W u S Increase In Demand W c D 2 D 1 Q c Q u Quantity of Labor LO4 13-13
Wage Rate (Dollars) S 2 S 1 W u W c Decrease In Supply D Q u Q c Craft Union Model Quantity of Labor restrictive membership, occupational licensing (plumbers, doctors) LO4 13-14
Wage Rate (Dollars) Industrial Union Model Inclusive unionism-all WORKERS Auto and steel workers S W u a b e W c D Q u Q c Q e Quantity of Labor LO4 13-15
LO4 13-16 Bilateral Monopoly Model Monopsony and inclusive unionism Single buyer and seller Not uncommon Indeterminate outcome Desirability
LO4 Wage Rate (Dollars) 13-17 Bilateral Monopoly Model MRC S W u W c a W m D=MRP Q u =Q m Q c Quantity of Labor
LO5 13-18 The Minimum Wage Controversy Case against minimum wage Case for minimum wage State and locally set rates Evidence and conclusions
LO5 13-19 Wage Differentials Differences across occupations What explains wage differentials? Marginal revenue productivity Noncompeting groups Ability Education and training Compensating differences
Wage Differentials LO5 13-20
LO5 13-21 Wage Differentials Workers prevented from moving to higher paying jobs Market imperfections Lack of job information Geographic immobility Unions and government restraints Discrimination
LO6 13-22 Pay for Performance The principal-agent problem-shirking v. not shirking (utility) Incentive pay plan Piece rates Commissions or royalties Bonuses, stock options, and profit sharing Efficiency wages Negative side-effects