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26. Wage Determination. Chapter Objectives. Why Labor Productivity and Real Hourly Compensation Track So Closely Over Time How Wage Rates and Employment Levels are Determined in Competitive Labor Markets How Monopsony Can Reduce Wages Below Competitive Levels

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Wage determination

26

Wage

Determination


Chapter objectives

Chapter Objectives

  • Why Labor Productivity and Real Hourly Compensation Track So Closely Over Time

  • How Wage Rates and Employment Levels are Determined in Competitive Labor Markets

  • How Monopsony Can Reduce Wages Below Competitive Levels

  • How Unions Can Increase Wage Rates

  • The Major Causes of Wage Differentials

  • The Types, Benefits, and Costs of “Pay-for-Performance” Plans


Labor wages and earnings

Labor Wages and Earnings

  • Wage Rate

  • Nominal Wage

  • Real Wage

  • General Level of Wages

  • Role of Productivity

    • Plentiful Capital

    • Access to Abundant Natural Resources

    • Advanced Technology

    • Labor Quality

    • Other Factors


Labor wages and earnings1

GLOBAL PERSPECTIVE

Labor Wages and Earnings

Hourly Wages of Production Workers

Selected Nations

Hourly Pay in U.S. Dollars, 2004

0 5 10 15 20 25 30 35

33.75

Denmark

Germany

Switzerland

Sweden

United Kingdom

France

United States

Australia

Japan

Canada

Italy

Korea

Taiwan

Mexico

32.53

30.26

28.42

24.71

23.89

23.17

23.09

21.90

21.42

20.48

11.52

5.97

2.50

Source: U.S. Bureau of Labor Statistics, 2006


Labor wages and earnings2

GLOBAL PERSPECTIVE

Labor Wages and Earnings

Source: U.S. Bureau of Labor Statistics, 2006


Real wages and productivity

Real Wages and Productivity

  • Secular Growth of Real Wages

  • Long Run Trend of Real Wages in the U.S.

S2020

S2000

S1950

S1900

Real Wage Rate (Dollars)

D2020

D2000

D1950

D1900

Quantity of Labor


Purely competitive labor market

Purely Competitive Labor Market

  • Market Demand for Labor

  • Market Supply for Labor

  • Labor Market Equilibrium

  • MRP = MRC Rule

    Graphically…


Purely competitive labor market1

G 26.1

Purely Competitive Labor Market

Labor Market

Individual Firm

a

S

b

e

s=MRC

Wage Rate (Dollars)

Wage Rate (Dollars)

($10)

WC

($10)

WC

D=MRP

(∑ mrps)

d=mrp

c

0

0

qC

QC

(5)

(1000)

Quantity of Labor

Quantity of Labor


Monopsony model

O 26.1

G 26.2

Monopsony Model

  • Monopsony

  • Upward-Sloping Labor Supply to Firm

  • MRC Higher Than the Wage Rate

  • Equilibrium Wage and Employment

    Graphically…


Monopsony model1

W 26.1

Monopsony Model

Monopsonistic Labor Market

MRC

S

b

a

Wage Rate (Dollars)

Wc

Wm

c

MRP

0

Qc

Qm

Quantity of Labor

Examples of Monopsony Power


Three union models

Three Union Models

  • Demand Enhancement Model

    • Increase Product Demand

    • Increase Productivity

    • Alter the Price of Other Inputs

S

Increase

In Demand

Wu

Wage Rate (Dollars)

Wc

D2

D1

Qu

Qc

Quantity of Labor


Three union models1

Three Union Models

  • Exclusive or Craft Union Model

    • Restricted Immigration

    • Reduced Child Labor

    • Encouraged Compulsory Retirement

    • Shorter Hour Workweek

    • Exclusive Unionism

    • Occupational Licensing

      Graphically…


Three union models2

Three Union Models

  • Exclusive or Craft Union Model

S2

S1

Wage Rate (Dollars)

Decrease

In Supply

Wu

Wc

D

Qu

Qc

Quantity of Labor


Three union models3

Three Union Models

  • Inclusive or Industrial Union Model

    • Inclusive Unionism

S

b

a

Wage Rate (Dollars)

Wu

e

Wc

D

Qu

Qe

Qc

Quantity of Labor


Three union models4

Three Union Models

  • Wage Increases and Unemployment

  • Average 15% Higher Wages

  • Reduced Employment Levels Corrected by:

    • Growth

    • Elasticity


Bilateral monopoly

Bilateral Monopoly

  • Indeterminate Outcome

  • Desirability of Bilateral Monopoly

S

MRC

Wage Rate (Dollars)

Wu

a

Wc

Wm

D=MRP

Qu=Qm

Qc

Quantity of Labor


Minimum wage

Minimum Wage

  • Case Against the Minimum Wage

  • Case For the Minimum Wage

  • State and Locally Set Rates

  • Evidence and Conclusions


Wage differentials

Annual Average Wages

Occupation

Wage Differentials

Average Annual Wages in Selected Occupations, 2005

$177,690

135,040

97,350

96,620

95,570

79,230

60,620

56,880

47,270

45,630

37,750

24,700

23,170

22,420

21,100

15,500

Surgeons

Aircraft Pilots

Petroleum Engineers

Financial Managers

Law Professors

Chemical Engineers

Dental Hygienists

Registered Nurses

Police Officers

Electricians

Travel Agents

Barbers

Retail Salespersons

Recreation Workers

Teacher Aides

Fast Food Cooks

Source: Bureau of Labor Statistics, 2006


Wage differentials1

O 26.2

Wage Differentials

  • Marginal Revenue Productivity

  • Noncompeting Groups

    • Ability

    • Education and Training

      • Human Capital

  • Compensating Differences


Wage differentials2

Wage Differentials

Education Levels and Individual Annual Earnings

Educational

Attainment

Professional Degree

Annual Earnings (Thousands of Dollars)

Bachelor’s Degree

Associate’s Degree

High School Diploma

Age


Wage differentials3

Wage Differentials

  • Marginal Revenue

  • Market Imperfections

    • Lack of Job Information

    • Geographic Immobility

    • Unions and Government Restraints

    • Discrimination


Pay for performance

O 26.3

O 26.4

Pay for Performance

  • The Principal-Agent Problem Revisited

  • Incentive Pay Plan

  • Piece Rates

  • Commissions or Royalties

  • Bonuses, Stock Options, and Profit Sharing

  • Efficiency Wages

  • Negative Side-Effects of Pay for Performance


Are chief executive officers ceos overpaid

Are Chief Executive Officers (CEOs) Overpaid?

Last

Word

  • Current U.S. CEO Salaries are High Relative to Domestic or Foreign Firms

  • Several Possible Reasons

  • Marginal Productivity Impact by Good Decisions

  • Top Salaries Like “Prize” Goals for all to Have as a Goal Impacting Many Jobs

  • High Salary Bias by Board Members Due to their Own Previous Performances

  • Some Argue High Salaries are Unjustified and are Unfair to Stockholders


Key terms

wage rate

nominal wage

real wage

purely competitive labor market

monopsony

exclusive unionism

occupational licensing

inclusive unionism

bilateral monopoly

minimum wage

wage differentials

marginal revenue productivity

noncompeting groups

human capital

compensating differences

incentive pay plan

Key Terms


Next chapter preview

Next Chapter Preview…

Rent, Interest,

and Profit

Chapter 27!


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