Wage Determination
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Transcript of Wage Determination
Chapter 15Wage Determination
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
15-2
• Wages
• Price paid for labor
• Direct pay plus fringe benefits
• Wage rate
• Nominal wage
• Real wage
• General level of wages
Labor, Wages, and Earnings
LO1
15-3
Global Perspective
LO1
15-4
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
15-5
Real Wages and Productivity
• Long-run trend of real wages in the U.S.
Rea
l Wag
e R
ate
(Do
llars
)
Quantity of Labor
D1900
S1900
D1950
D2000D2020
S1950
S2000
S2020
LO1
15-6
Real Wages and Productivity
LO1
15-7
Competit ive 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
15-8
($10)WC
($10)WC
Wag
e Ra
te (D
olla
rs)
Labor Market
Quantity of Labor
Wag
e Ra
te (D
olla
rs)
Individual Firm
Quantity of Labor
QC
(1000)
0 0
d=mrp
qC(5)
s=MRC
Competit ive Labor Market
LO2
D=MRP(∑ mrp’s)
S
e b
a
c
15-9
Monopsony Model
• Employer has buying power
• Characteristics
• Single buyer
• Labor immobile
• Firm is a “wage maker”
• Upsloping labor supply to firm
• MRC higher than wage rate
• Equilibrium
LO3
15-10
• Examples of monopsony power
Monopsony ModelW
age
Rate
(Dol
lars
)
Quantity of Labor
0
S
MRP
MRC
c
b
aWc
Wm
Qm Qc
LO3
15-11
Monopsony Power
• Maximize profit by hiring smaller number of workers
• Examples of monopsony power
• Nurses
• Professional Athletes
• Teachers
• Three union models
LO3
15-12
Demand Enhancement Model• Union model• Increase demand for union labor by altering price of other inputs
Wag
e Ra
te (D
olla
rs)
Quantity of Labor
Wu
Qc Qu
Wc
D1
D2
S
IncreaseIn Demand
LO4
15-13
Craft Union Model
• Effectively reduce supply of labor
• Restrict immigration
• Reduce child labor
• Compulsory retirement
• Shorter workweek
• Exclusive unionism
• Occupational licensing
LO4
15-14
Wag
e Ra
te (D
olla
rs)
Quantity of Labor
D
S1
Qc
Wc
S2
Wu
Qu
DecreaseIn Supply
Craft Union Model
LO4
15-15
Industrial Union Model
• Inclusive unionism• Auto and steel workers
Wag
e Ra
te (D
olla
rs)
Quantity of Labor
D
S
Qc
Wc
Wu
Qu Qe
a be
LO4
15-16
Wage Increases and Job Loss
• Are unions successful?
•Wages 15% higher on average
• Consequences:
• Higher unemployment
• Restricted ability to demand higher wages
LO4
15-17
Bilateral Monopoly Model
• Monopsony and inclusive unionism
• Single buyer and seller
• Not uncommon
• Indeterminate outcome
• Desirability
LO5
15-18
Bilateral Monopoly Model
LO5
Wag
e Ra
te (D
olla
rs)
Quantity of Labor
D=MRP
S
Qc
Wc
Wu
Qu=Qm
MRC
Wm
a
15-19
The Minimum Wage Controversy
• Case against minimum wage
• Case for minimum wage
• State and locally set rates
• Evidence and conclusions
LO6
15-20
Wage Differentials
LO7
15-21
Sa
Da
Sb
Db
Sc
Dc
Sd
Dd
W W
WW
Q
Q Q
Q0
0 0
0
Wa
Wb
Wc
Wd
Qa Qb
Qc Qd
(a) (b)
(c) (d)
LO7
Wage Differentials
15-22
Wage Differentials
• Differences across occupations
• What explains wage differentials?
• Marginal revenue productivity
• Noncompeting groups
• Ability
• Education and training
• Compensating differences
LO7
15-23
Wage Differentials
LO7
15-24
Wage Differentials
• Workers prevented from moving to higher paying jobs
• Market imperfections
• Lack of job information
• Geographic immobility
• Unions and government restraints
• Discrimination
LO7
15-25
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
LO8
15-26
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