15-1 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 8e, by Jackson & McIver...

15-1Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 8e, by Jackson & McIverBy Muni Perumal, University of Canberra, Australia

Chapter 15

Wage determination


Learning objectives• Understand the forces underlying the general

level of wage rates in Australia• See how wage rates are determined,

in particular, labour markets, by presenting several representative labour market models

• Analyse the impact of unions on the structure and level of wages

• Discuss the economic effects of minimum wages

• Explain wage differentials


Wages• Wages rates

– Price paid for the use of labour

• Earnings– Wage rates and the number of hours or weeks

of labour service supplied in the market


Nominal vs real wages• Nominal wages

– Amount of money received by an individual or group during some period of time

• Real wages– Amount of goods and services an individual or

group can purchase with their nominal incomeduring some period of time


General level of wages• The general or average level of wages is a

composite index encompassing a wide range of specific wage rates

• Role of productivity– Partly determines the demand for labour– The greater the productivity of labour, the higher

the demand for it


Productivity in AustraliaLabour in Australia is highly productive. Why?• High quality and quantity of capital

– The average Australian worker is assisted by $188 644 of investment capital

• Abundant natural resources– Natural resources are very abundant in relation

to the size of the labour force

• Technological advances– The level of technological advance is generally

higher in Australia than in many other countries


Productivity in Australia (cont.)Labour in Australia is highly productive. Why?• Labour quality

– Superior health, vigour, education and trainingof Australian workers

• Other factors– Management flexibility– Stable socio-political environment– Size of domestic and overseas markets enables

firms to realise economies in production


Output per hour and average hourly earnings


Wage determination in competitive labour market

Characteristics of a purely competitive labour market:• Many firms competing for labour• Many qualified workers acting as independent

suppliers• Both firms and workers are ‘price takers’; that is,

‘wage takers’• MRC is constant and equal to resource price• Individual firm will find it profitable to hire up

to the point at which the going wage rate is equal to MRP of labour


Wage determination in competitive labour market (cont.)

• Market demand for labour– Obtained by summing horizontally the labour

demand curves of individual firms

• Market supply of labour– Supply curve is up-sloping: higher wages are

necessary for more labour


Wage determination in competitive labour market (cont.)

• Market equilibrium– MRC is constant and equal to resource price– Individual firm will find it profitable to hire up to the point

at which the going wage rate is equal to MRP of labour


Supply & demand for labour: competitive labour market

Wag

e ra

te (

do

llar

s)

Quantity of labour Quantity of labourIndividual firm Market

D

D = MRP

( of MRPs)

S

S = MRCWc Wc

($6)($6)

d

d

MRP curve

qc Qc

($6)($6)


Wage determination: monopsony

• Monopsony is a market in which there is only one buyer of a resource

• The firm dominates employment of a particular type of labour

• Immobile or inflexible labour type• Firm is a ‘wage maker’


Wage determination: monopsony (cont.)

• Characteristics– Up-sloping labour supply curve– MRC exceeds wage rate

• Equilibrium– Up to point where MRC = MRP

• Results– Lower wages, employment levels and output


Monopsonistic labour market

Wa

ge

ra

te (

do

llars

)

S

Quantity of labour

MRCMRP

MRP

Qm

Wm

b

C

aWc

Qc

The competitiveThe competitivesolution wouldsolution would

result in a higherresult in a higherwage and greaterwage and greater

employmentemployment


Wage determination: monopsonyComplication — monopoly power in product market

• Restrictive monopoly or oligopoly – Resource demand curve is depressed

– Even lower wages, and fewer employment • Progressive monopoly

– Resource demand curve shifts to the right– Increases labour volumes


Supply imperfections: some union models

• Unions– Basic objective: increase wage rates. How?

• Three alternative models1. Increasing the demand for labour

2. Exclusive or craft unionism Exclusive unionism — higher wages by excluding

workers from the union and therefore the supply of labour

Occupational licensing — law prohibits people from practising a trade if they do not meet specific requirements


D2

Demand-enhancement union model

Wag

e ra

te (

do

llar

s)

Q of labour

D

W1

Q1

S

Q2

W2


Exclusive or craft union model

Wag

e ra

te (

do

llar

s)

Q of labour

D

W1

Q1

S1

W2

Q2

...restrictive membership policies

S2

...restrictinglabour supply of the economy as a whole


Supply imperfections: some union models• Unions

– Basic objective: increase wage rates. How?

• Three alternative models3. Inclusive or industrial unionism

– Industrial unions are one where all available workers become members of the union. The unions through control of the supply of labour may impose a wage rate above the competitive equilibrium wage rate


Inclusive unionism model

Wag

e ra

te (

do

llar

s)

S

Quantity of labour

D

Wc

Qc

Wu

...by organising virtually all workers and thereby control of the supply curve for labour

b a


Wage increases and unemployment

• Union efforts to bolster wages may reduce employment

• Reducing unemployment impact– Economic growth– Elasticity of demand for labour


Wage determination:bilateral monopoly

• A market in which there is a single seller and a single buyer of labour

• Big industry and big union• Effect on wages is indeterminable and depends

on the power of the respective parties• Desirability


S

Bilateral monopoly model

Wu

Qu = Qm

Wag

e ra

te (

do

llar

s)

Quantity of labour

D

Wc

…economic theorycannot

determine the actual outcome

Wm

Qc

MRC

MRC


Minimum wages• An anti-poverty device• Case against minimum wages

– Higher wages may force some firms out of business– Increased unemployment– Lower wages are better than no wages

• Case for minimum wages– Higher wages may cause a monopsonist to stop

restricting employment– Increased productivity


Minimum wages (cont.)• Empirical evidence

– Evidence from overseas studies suggests that periodic increase in the minimum wage are followed by decline in employment in affected industries

– Those in employment tend to receive higher wages and tend to escape poverty

– Overall result: a mixed and ambiguous one


Wage differentials: causes• Heterogeneity of workforce

– Ability– Education– Training

• Variety of attractiveness of jobs• Market imperfections


Wage differentials: causes (cont.)• Non-competing groups

– Ability– Investing in human capital: education

and training

• Compensating differences


Educational attainment, age and average weekly earnings of full-time workers


Wage differentials: causes (cont.)

• Imperfection in labour market– Geographical immobilities– Institutional immobilities– Sociological immobilities in the form of discrimination


Next chapter:

Rent, interest and profits

15-1 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 8e, by Jackson & McIver...

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