Wage Determination

Chapter 13

McGraw-Hill/Irwin

Copyright 2009 by The McGraw-Hill Companies, Inc. All rights reserved.

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
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

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
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

Long run trend of average real wages in the U.S.

Variation
Real Wage Rate (Dollars)

across occupations
S2020 S2000 S1900

S1950

D1950 D1900

D2000

D2020

Quantity of Labor

13-6

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
13-7

Competitive Labor Market

Labor Market
S
Wage Rate (Dollars) Wage Rate (Dollars)

Individual Firm
a

($10) WC

($10) WC

s=MRC

D=MRP ( mrps)
0 QC
(1000)

c
qC
(5)

d=mrp

Quantity of Labor

Quantity of Labor

13-8

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

Monopsony Model
MRC S

Wage Rate (Dollars)

b
Wc Wm

a c
MRP

Qm

Qc

Quantity of Labor

Examples of monopsony power

13-10

Demand Enhancement Model

Union model
Increase product demand Alter price of other inputs

Wage Rate (Dollars)

Wu Wc

Increase In Demand
D2

D1
Qc Qu
13-11

Quantity of Labor

Craft Union Model

Effectively reduce supply labor

Restrict

immigration Reduce child labor Compulsory retirement Shorter workweek

Exclusive unionism Occupational licensing

13-12

Craft Union Model

S2 Wage Rate (Dollars)

S1

Wu Wc

Decrease In Supply

D
Qu Qc
13-13

Quantity of Labor

Industrial Union Model

Inclusive unionism
Auto
Wage Rate (Dollars)

and steel workers

S

Wu Wc

b e

D
Qu Qc Qe

Quantity of Labor
13-14

Union Models
Are unions successful? Wages 15% higher on average Consequences:

Higher

unemployment Restricted ability to demand higher wages

13-15

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

13-16

Bilateral Monopoly

MRC Wage Rate (Dollars)

Wu Wc Wm

D=MRP
Qu=Qm
Qc
13-17

Quantity of Labor

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

13-18

Wage Differentials
Average Annual Wages, 2007
Occupation 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 Annual Average Wages $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
Source: Bureau of Labor Statistics, 2006 13-19

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

160,000

Annual Earnings (Thousands of Dollars)

140,000 120,000

Educational Attainment

Professional Degree
100,000 80,000 60,000 40,000 20,000 0 18-24 25-34 35-44 45-54 55-64 65+
13-21

Bachelors Degree Associates Degree

High School Diploma

Age

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

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?

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

wage rate nominal wage real wage

minimum wage wage differentials marginal revenue productivity noncompeting groups human capital

purely competitive labor market

monopsony

exclusive unionism
occupational licensing

compensating differences
incentive pay plan

inclusive unionism
bilateral monopoly
13-25

Next Chapter Preview

Rent, Interest, and Profit

13-26