
Labor, Wages, and Earnings • Wages • Price paid for labor • Direct pay plus fringe benefits • Wage rate • Nominal wage • Real wage • General level of wages LO1
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 • Other factors LO1
Real Wagesand Productivity • Long-run trend of average real wages in the U.S. S2020 S2000 S1950 S1900 Real Wage Rate (Dollars) D2020 D2000 D1950 D1900 Quantity of Labor LO1
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
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 (∑ mrp’s) d=mrp c 0 0 qC QC (5) (1000) Quantity of Labor Quantity of Labor LO2
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 LO3
Monopsony Model • Examples of monopsony power MRC S b Wage Rate (Dollars) a Wc Wm c MRP 0 Qc Qm Quantity of Labor LO3
Monopsony Power • Maximize profit by hiring smaller number of workers • Examples of monopsony power • Nurses • Professional Athletes • Teachers • Three union models LO3
Demand Enhancement Model • Union model • Increase product demand • Alter price of other inputs S Increase In Demand Wage Rate (Dollars) Wu Wc D2 D1 Qc Qu Quantity of Labor LO4
Craft Union Model S2 S1 Wage Rate (Dollars) Decrease In Supply Wu Wc D Qu Qc Quantity of Labor LO4
Industrial Union Model • Inclusive unionism • Auto and steel workers S b a Wage Rate (Dollars) Wu e Wc D Qu Qe Qc Quantity of Labor LO4
Bilateral Monopoly Model • Monopsony and inclusive unionism • Single buyer and seller • Not uncommon • Indeterminate outcome • Desirability LO4
Bilateral Monopoly Model S MRC Wu Wage Rate (Dollars) a Wc Wm D=MRP Qu=Qm Qc Quantity of Labor LO4
The Minimum Wage Controversy • Case against minimum wage • Case for minimum wage • State and locally set rates • Evidence and conclusions LO5
Wage Differentials • Differences across occupations • What explains wage differentials? • Marginal revenue productivity • Noncompeting groups • Ability • Education and training • Compensating differences LO5
Wage Differentials • Workers prevented from moving to higher paying jobs • Market imperfections • Lack of job information • Geographic immobility • Unions and government restraints • Discrimination LO5
Pay for Performance • The principal-agent problem • Incentive pay plan • Piece rates • Commissions or royalties • Bonuses, stock options, and profit sharing • Efficiency wages • Negative side-effects LO6