Labor
• Broadly defined as:
• 1. Blue and white collar workers
• 2. Professionals- doctors, lawyers
• 3. Owners of small businesses
Wages
• Hourly pay, annual salaries, bonuses, commissions, royalties, and fringe benefits (vacations, health insurance, pensions)
• Wage Rate- Price paid per hour of service
Nominal v Real Wage
• Nominal Wage- the amount of money received per hour, day, or year
• Real Wage- the quantity of goods and services a worker can obtain with nominal wages---the “purchasing power” of nominal wages
Real Wages Cont’d
• Real wages depend on your nominal wage and the price of goods/services you purchase
• Ex- you receive a 5% raise in nominal wages but the price of goods goes up 3%
• *** your real wages increase by 2%
Labor Wages and Earnings
GLOBAL PERSPECTIVE
Hourly Wages of Production WorkersSelected Nations
Hourly Pay in U.S. Dollars, 2004
Source: U.S. Bureau of Labor Statistics, 2006
DenmarkGermany
SwitzerlandSweden
United KingdomFrance
United StatesAustralia
JapanCanada
ItalyKorea
TaiwanMexico
0 5 10 15 20 25 30 35
33.7532.53
30.2628.42
24.7123.89
23.1723.09
21.9021.4220.48
11.525.97
2.50
Reasons for High Productivity
• 1. large amounts of physical capital
• 2. access to abundant natural resources
• 3. advanced technology
• 4. labor quality-better health, education and training
• 5. other factors such as work environment and flexible management
Real Wages and Productivity
• Over long periods of time, productivity and real wages tend to rise together
Purely Competitive Labor Market
• 1. numerous firms compete with one another in hiring a specific type of labor
• 2. many workers with identical skills supplying the same type of labor
• 3. individual firms and workers are “wage takers”
Market Demand for Labor• To find the total or market demand curve for a
particular labor service, sum horizontally the labor demand curves (the marginal revenue product curves) of the individual firms
($10)WC
Labor Market
Quantity of Labor
QC
(1000)
0
D=MRP(∑ mrps)
S
Market Supply of Labor
• The supply curve slopes upward, indicating the employers as a group must pay higher wage rates to obtain more workers
• The higher wages are used to attract workers away from other industries and locales
Labor Market Equilibrium
• The intersection of the market labor demand curve and the market supply curve determines the equilibrium wage rate and level of employment
($10)WC
Quantity of Labor
QC
(1000)
0
D=MRP(∑ mrps)
S
Individual Firm
• The individual firm in a perfectly competitive firm maximizes profit by hiring workers to the point where Wage rate = MRP
Wag
e R
ate
(Do
llar
s)
($10)WC
Quantity of Labor
0
d=mrp
qC
(5)
s=MRC
c
Monopsony
A single employer of labor has substantial buying (hiring power) with the following characteristics:
1. Only a single buyer of a particular good
2. Labor is immobile (workers would have to move or acquire new skills)
3. The firm is a wage maker
**monopsony power can vary
Monopsony Model
Wag
e R
ate
(Do
llars
)
Quantity of Labor
0
S
MRP
MRC
c
b
aWc
Wm
Qm Qc
Examples of Monopsony Power
Monopsonistic Labor Market
W 14.1
Examples of Monopsonies
• Some markets such as:
• nurses: one hospital
• professional athletes: drafts
• public school teachers: only one school
MRC Higher than Wage Rate
• When a monopsonist pays a higher wage to attract new workers, it must pay more to current workers as well
• Ex- one worker can be hired @ $6 and a second worker can be hired for $7
• Therefore the Marginal Resource Cost of the second worker is $8…the $7 plus the $1 raise to worker #1
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