Lecture Economics (18th edition): Chapter 13 - McConnell, Brue, Flynn''s

Chapter 13
Wage
Determination

McGraw­Hill/Irwin

        Copyright © 2009 by The McGraw­Hill 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.
Real Wage Rate (Dollars)

– Variation across occupations
S2020

S1900

D1900

S1950

D1950

S2000

D2000

Quantity of Labor

D2020

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

Individual Firm
a

($10)
WC

($10)
WC

D=MRP
(∑ mrp’s)
0

Wage Rate (Dollars)

Wage Rate (Dollars)

S

QC

(1000)

Quantity of Labor

0

e

b

c

s=MRC

d=mrp

qC

(5)

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

Wage Rate (Dollars)

MRC

S

b
a

Wc
Wm

c
MRP

0

Qm

Qc

Quantity of Labor

• Examples of monopsony power

13-10


Demand Enhancement Model
• Union model

Wage Rate (Dollars)

– Increase product demand
– Alter price of other inputs

S
Increase
In Demand

Wu
Wc

D2
D1
Qc

Qu

Quantity of Labor

13-11


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

Wage Rate (Dollars)

S2

S1

Decrease
In Supply

Wu
Wc

D
Qu

Qc

Quantity of Labor
13-13


Industrial Union Model
• Inclusive unionism

– Auto and steel workers
Wage Rate (Dollars)

S

Wu

a

b

e

Wc

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

S

Wage Rate (Dollars)

MRC

Wu

a

Wc
Wm

D=MRP
Qu=Qm

Qc

Quantity of Labor

13-17


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
Annual Earnings (Thousands of Dollars)

160,000
140,000

Educational
Attainment

120,000

Professional Degree
100,000
80,000

Bachelor’s Degree

60,000

Associate’s Degree

40,000

High School Diploma

20,000
0
18-24

25-34

35-44

45-54

Age

55-64

65+
13-21


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

• minimum wage

• nominal wage

• wage differentials

• real wage

• marginal revenue
productivity

• purely competitive
labor market

• noncompeting groups

• monopsony

• human capital

• exclusive unionism

• compensating

differences

• occupational
licensing

• incentive pay plan

• inclusive unionism
• bilateral monopoly

13-25