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Chapter 13. Wage Determination. Chapter Objectives. Labor productivity and real compensation Wage and employment determination Competitive and monopsony markets Unions and wage rates Causes of wage differentials “Pay-for-Performance” plans. 13- 2. Labor Wages and Earnings. Wages

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slide1

Chapter 13

Wage

Determination

chapter objectives
Chapter Objectives
  • Labor productivity and real compensation
  • Wage and employment determination
  • Competitive and monopsony markets
  • Unions and wage rates
  • Causes of wage differentials
  • “Pay-for-Performance” plans

13-2

labor wages and earnings
Labor Wages and Earnings
  • Wages
    • Price paid for labor
    • Direct pay plus fringe benefits
  • Wage rate
  • Nominal wage
  • Real wage
  • General level of wages

13-3

level of wages across nations
Level of Wages Across Nations

Hourly Wages of Production Workers

Hourly Pay in U.S. Dollars, 2006

0 5 10 15 20 25 30 35

Germany

Sweden

Switzerland

United Kingdom

Australia

Canada

Italy

France

United States

Japan

Spain

Korea

Taiwan

Mexico

Source: U.S. Bureau of Labor Statistics, 2006

13-4

role of productivity
Role of Productivity
  • Labor demand depends on productivity
  • U.S. labor highly productive
    • Plentiful capital
    • Access to abundant natural resources
    • Advanced technology
    • Labor quality
    • Other factors

13-5

real wages
Real Wages
  • Long run trend of average real wages in the U.S.
    • Variation across occupations

S2020

S2000

S1950

S1900

Real Wage Rate (Dollars)

D2020

D2000

D1950

D1900

Quantity of Labor

13-6

competitive labor market
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

13-7

slide8

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

13-8

monopsony model
Monopsony Model
  • Employer has buying power
  • Characteristics
    • Single buyer
    • Labor immobile
    • Firm “wage maker”
  • Firm labor supply upward sloping
  • MRC higher than wage rate
  • Equilibrium

13-9

slide10

Monopsony Model

MRC

S

b

a

Wage Rate (Dollars)

Wc

Wm

c

MRP

0

Qc

Qm

Quantity of Labor

  • Examples of monopsony power

13-10

demand enhancement model
Demand Enhancement Model
  • Union model
    • Increase product demand
    • Alter price of other inputs

S

Increase

In Demand

Wu

Wage Rate (Dollars)

Wc

D2

D1

Qu

Qc

Quantity of Labor

13-11

craft union model
Craft Union Model
  • Effectively reduce supply labor
    • Restrict immigration
    • Reduce child labor
    • Compulsory retirement
    • Shorter workweek
  • Exclusive unionism
  • Occupational licensing

13-12

craft union model13
Craft Union Model

S2

S1

Wage Rate (Dollars)

Decrease

In Supply

Wu

Wc

D

Qu

Qc

Quantity of Labor

13-13

industrial union model
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

13-14

union models
Union Models
  • Are unions successful?
  • Wages 15% higher on average
  • Consequences:
    • Higher unemployment
    • Restricted ability to demand higher wages

13-15

bilateral monopoly
Bilateral Monopoly
  • Monopsony and inclusive unionism
  • Single buyer and seller
  • Not uncommon
  • Indeterminate outcome
  • Desirability

13-16

bilateral monopoly17
Bilateral Monopoly

S

MRC

Wage Rate (Dollars)

Wu

a

Wc

Wm

D=MRP

Qu=Qm

Qc

Quantity of Labor

13-17

minimum wage
Minimum Wage
  • Case against minimum wage
  • Case for minimum wage
  • State and locally set rates
  • Evidence and conclusions

13-18

wage differentials
Wage Differentials

Annual Average Wages

Occupation

Average Annual Wages, 2007

$191,410

148,810

113,890

106,200

95,510

84,240

64,910

62,480

50,670

48,100

32,190

25,860

24,530

23,790

22,820

16,860

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

13-19

labor supply and demand
Labor Supply and Demand
  • Differences across occupations
  • Explains wage differentials
  • Marginal revenue productivity
  • Noncompeting groups
    • Ability
    • Education and training
  • Compensating differences

13-20

education and annual earnings
Education and Annual Earnings

Educational

Attainment

Professional Degree

Annual Earnings (Thousands of Dollars)

Bachelor’s Degree

Associate’s Degree

High School Diploma

Age

13-21

wage differentials22
Wage Differentials
  • Workers prevented from moving to higher paying jobs
  • Market imperfections
    • Lack of job information
    • Geographic immobility
    • Unions and government restraints
    • Discrimination

13-22

pay for performance
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

13-23

are ceos overpaid
Are CEOs Overpaid?
  • U.S. CEO salaries relatively high
  • Good decisions enhance productivity
  • Limited supply, high MRP
  • Incentive to raise productivity at all levels
  • High salary bias by board members
  • Unsettled issue

13-24

key terms
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

13-25

next chapter preview
Next Chapter Preview…

Rent, Interest,

and Profit

13-26

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