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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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slide1

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
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Next Chapter Preview…

Rent, Interest,

and Profit

Chapter 27!