Ch 28 Wage Determination • Most important price you will encounter in your lifetime will be your hourly wage rate • It is critical to determining your economic well-being.
Wage Determination This chapter explores how the supply of land, labor, capital and entrepreneurial ability interacts with demand for those resources in order to explain how wages, rents, interests and profits are determined.
Wage Determination • Wages and Salaries are first in the discussion because they account for nearly 78% of national income • Read pages 582-584 for general wage discussion
Purely Competitive Labor Market • Many firms compete with one another in hiring specific types of labor. • Numerous qualified workers with identical skills independently supply this type of labor. • “Wage-taker” behavior pertains to both individual firms and individual workers
Purely Competitive Labor Market Question: What determines the wage in a competitive labor market?
Purely Competitive Labor Market The supply curve slopes upward because higher wages are needed to attract more workers Higher wages entice more workers to offer their labor services in that market. See figure 28-3b curve S. Market Supply of Labor
Purely Competitive Labor Market Determined by the intersection of the market labor demand and supply curves The individual firm is a wage taker because the firm employs such a small fraction of the total supply of labor it cannot influence the wage rate. Labor Market Equilibrium
Purely Competitive Labor Market The individual firm finds it profitable to hire labor up to the point at which marginal revenue product is equal to marginal resource cost.See Figure 28-3a Total revenue is area 0abcGreen rectangle represents total wage cost Lavender triangle represents non-labor cost Labor Market Equilibrium
The situation is quite different in monopsony, a market in which an employer of resources has monopolistic buying (hiring) power. Monopsony Model
Monopsony Model • There is only a single buyer of a particular kind of labor • This type of labor is relatively immobile, either geographically or because workers would have to acquire new skills. • Firm is a “wage maker” in that the wage rate it must pay varies with the number of workers employed. “Only game in town”
Monopsony Model Question: Why is the supply curve for labor upsloping?
Monopsony Model • MRC is higher than the wage rate Paying a uniform wage to all workers means that the cost of an extra worker – the marginal resource (labor) cost (MRC) – is the sum of that worker’s wage rate and the amount necessary to bring the wage rate of all current workers up to the new wage level.
Monopsony Model See figure 28-4. To maximize profit it will employ the quantity where MRC =MRP It then looks at the supply curve to point c, the wage rate it will pay. The monopsonistic employer of resources finds it profitable to restrict employment to depress wage rates and therefore costs.
Three Union Models • Demand-Enhancement Model • Exclusive or Craft Union Model • Inclusive or Industrial Union Model
Three Union Models • Demand-Enhancement Model – The most desirable technique for raising wage rates is to increase the demand for labor. • An increase in the demand for labor will result in both higher wage rates and more jobs
Three Union Models Increase Product demand – advertising (buy the union label), political lobbying Demand-Enhancement Model Increase Productivity Change Prices of Other Inputs – support increase in minimum wage
Three Union Models Specific types of workers have adopted techniques designed to restrict numbers. Craft unions are one example. They are comprised of workers of a given skill, such as carpenters, bricklayers or plumbers. Exclusive or Craft Union Model
Three Union Models Occupational Licensing is another means of restricting the supply of specific kinds of labor. Here a group of workers in an occupation will pressure state or municipal governments to pass a law which say individuals can only practice their trade if they meet certain specified requirements. Exclusive or Craft Union Model
Three Union Models Here the union seeks to organize all available workers. Such unions include automobile workers and steel workers. Inclusive or Industrial Union Model These types of unions seek all unskilled, semiskilled, and skilled workers in an industry as members.
Three Union Models Evidence suggests that union members on the average achieve a 10 to 15 percent wage advantage over nonunion workers Unemployment effect may be reduced in two ways: Growth and Elasticity Wage Increases and Unemployment