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Chapter 26-Wage Determination

Chapter 26-Wage Determination. Presentation 1. Labor. Broadly defined as: 1. Blue and white collar workers 2. Professionals- doctors, lawyers 3. Owners of small businesses. Wages.

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Chapter 26-Wage Determination

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  1. Chapter 26-Wage Determination Presentation 1

  2. Labor • Broadly defined as: • 1. Blue and white collar workers • 2. Professionals- doctors, lawyers • 3. Owners of small businesses

  3. Wages • Hourly pay, annual salaries, bonuses, commissions, royalties, and fringe benefits (vacations, health insurance, pensions) • Wage Rate- Price paid per hour of service

  4. Nominal v Real Wage • Nominal Wage- the amount of money received per hour, day, or year • Real Wage- the quantity of goods and services a worker can obtain with nominal wages---the “purchasing power” of nominal wages

  5. Real Wages Cont’d • Real wages depend on your nominal wage and the price of goods/services you purchase • Ex- you receive a 5% raise in nominal wages but the price of goods goes up 3% • *** your real wages increase by 2%

  6. 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

  7. Reasons for High Productivity • 1. large amounts of physical capital • 2. access to abundant natural resources • 3. advanced technology • 4. labor quality-better health, education and training • 5. other factors such as work environment and flexible management

  8. Real Wages and Productivity • Over long periods of time, productivity and real wages tend to rise together

  9. Purely Competitive Labor Market • 1. numerous firms compete with one another in hiring a specific type of labor • 2. many workers with identical skills supplying the same type of labor • 3. individual firms and workers are “wage takers”

  10. Market Demand for Labor • To find the total or market demand curve for a particular labor service, sum horizontally the labor demand curves (the marginal revenue product curves) of the individual firms Labor Market S ($10) WC D=MRP (∑ mrps) 0 QC (1000) Quantity of Labor

  11. Market Supply of Labor • The supply curve slopes upward, indicating the employers as a group must pay higher wage rates to obtain more workers • The higher wages are used to attract workers away from other industries and locales

  12. Labor Market Equilibrium • The intersection of the market labor demand curve and the market supply curve determines the equilibrium wage rate and level of employment S ($10) WC D=MRP (∑ mrps) 0 QC (1000) Quantity of Labor

  13. Individual Firm • The individual firm in a perfectly competitive firm maximizes profit by hiring workers to the point where Wage rate = MRP s=MRC Wage Rate (Dollars) ($10) WC d=mrp c 0 qC (5) Quantity of Labor

  14. Monopsony A single employer of labor has substantial buying (hiring power) with the following characteristics: • Only a single buyer of a particular good 2. Labor is immobile (workers would have to move or acquire new skills) 3. The firm is a wage maker **monopsony power can vary

  15. W 14.1 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

  16. Examples of Monopsonies • Some markets such as: • nurses: one hospital • professional athletes: drafts • public school teachers: only one school

  17. MRC Higher than Wage Rate • When a monopsonist pays a higher wage to attract new workers, it must pay more to current workers as well • Ex- one worker can be hired @ $6 and a second worker can be hired for $7 • Therefore the Marginal Resource Cost of the second worker is $8…the $7 plus the $1 raise to worker #1

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