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Wage Determination and Labor Market Dynamics

Explore the complex world of wage determination, productivity, and labor market competitiveness. Learn about real wages, competitive markets, monopsony models, and the minimum wage controversy. Understand wage differentials, pay structures, and the impact of performance-based incentives.

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Wage Determination and Labor Market Dynamics

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  1. Wage Determination

  2. 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

  3. 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

  4. 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

  5. Real Wagesand Productivity LO1

  6. 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

  7. 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

  8. 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

  9. Monopsony Model • Examples of monopsony power MRC S b Wage Rate (Dollars) a Wc Wm c MRP 0 Qc Qm Quantity of Labor LO3

  10. Monopsony Power • Maximize profit by hiring smaller number of workers • Examples of monopsony power • Nurses • Professional Athletes • Teachers • Three union models LO3

  11. 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

  12. Craft Union Model S2 S1 Wage Rate (Dollars) Decrease In Supply Wu Wc D Qu Qc Quantity of Labor LO4

  13. 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

  14. Bilateral Monopoly Model • Monopsony and inclusive unionism • Single buyer and seller • Not uncommon • Indeterminate outcome • Desirability LO4

  15. Bilateral Monopoly Model S MRC Wu Wage Rate (Dollars) a Wc Wm D=MRP Qu=Qm Qc Quantity of Labor LO4

  16. The Minimum Wage Controversy • Case against minimum wage • Case for minimum wage • State and locally set rates • Evidence and conclusions LO5

  17. Wage Differentials • Differences across occupations • What explains wage differentials? • Marginal revenue productivity • Noncompeting groups • Ability • Education and training • Compensating differences LO5

  18. Wage Differentials LO5

  19. Wage Differentials • Workers prevented from moving to higher paying jobs • Market imperfections • Lack of job information • Geographic immobility • Unions and government restraints • Discrimination LO5

  20. 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

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