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WAGE DETERMINATIONPertemuan 21
Matakuliah : J0114-Teori EkonomiTahun : 2009
Bina Nusantara University 3
Labor Wages and Earnings
• Wage Rate• Nominal Wage• Real Wage• General Level of Wages• Role of Productivity
– Plentiful Capital– Access to Abundant Natural
Resources– Advanced Technology– Labor Quality– Other Factors
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Purely Competitive Labor Market
• Market Demand for Labor• Market Supply for Labor• Labor Market Equilibrium• MRP = MRC Rule
Graphically…
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Purely Competitive Labor Market
Wag
e R
ate
(Do
llar
s)
Wag
e R
ate
(Do
llar
s)
($10)WC
($10)WC
Labor Market Individual Firm
Quantity of Labor Quantity of Labor
QC
(1000)
0 0
D=MRP(∑ mrps) d=mrp
qC
(5)
s=MRC
S
e
c
b
a
Bina Nusantara University 6
Monopsony Model
• Monopsony• Upward-Sloping Labor Supply to Firm• MRC Higher Than the Wage Rate• Equilibrium Wage and Employment
Graphically…
O 26.1
G 26.2
Bina Nusantara University 7
Monopsony ModelW
age
Rat
e (D
olla
rs)
Quantity of Labor
0
S
MRP
MRC
c
b
aWc
Wm
Qm Qc
Examples of Monopsony Power
Monopsonistic Labor Market
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Three Union Models
• Demand Enhancement Model– Increase Product Demand– Increase Productivity– Alter the Price of Other Inputs
Wag
e R
ate
(Do
llar
s)
Quantity of Labor
Wu
Qc Qu
Wc
D1
D2
S
IncreaseIn Demand
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Three Union Models
• Exclusive or Craft Union Model– Restricted Immigration– Reduced Child Labor– Encouraged Compulsory Retirement– Shorter Hour Workweek– Exclusive Unionism– Occupational Licensing
Graphically…
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Three Union Models• Exclusive or Craft Union ModelW
age
Rat
e (D
olla
rs)
Quantity of Labor
D
S1
Qc
Wc
S2
Wu
Qu
DecreaseIn Supply
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Three Union Models• Inclusive or Industrial Union
Model– Inclusive Unionism
Wag
e R
ate
(Do
llars
)
Quantity of Labor
D
S
Qc
Wc
Wu
Qu Qe
a be
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Three Union Models
• Wage Increases and Unemployment• Average 15% Higher Wages• Reduced Employment Levels
Corrected by:– Growth– Elasticity
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Bilateral Monopoly• Indeterminate Outcome• Desirability of Bilateral Monopoly
Wag
e R
ate
(Do
llars
)
Quantity of Labor
D=MRP
S
Qc
Wc
Wu
Qu=Qm
MRC
Wm
a
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Minimum Wage
• Case Against the Minimum Wage• Case For the Minimum Wage• State and Locally Set Rates• Evidence and Conclusions
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Wage DifferentialsAverage Annual Wages in Selected Occupations, 2005
SurgeonsAircraft PilotsPetroleum EngineersFinancial ManagersLaw ProfessorsChemical EngineersDental HygienistsRegistered NursesPolice OfficersElectriciansTravel AgentsBarbersRetail SalespersonsRecreation WorkersTeacher AidesFast Food Cooks
$177,690135,040
97,35096,62095,57079,23060,62056,88047,27045,63037,75024,70023,17022,42021,10015,500
Occupation Annual Average Wages
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Wage Differentials
• Marginal Revenue Productivity• Noncompeting Groups
– Ability– Education and Training
•Human Capital
• Compensating DifferencesO 26.2
Bina Nusantara University 170
20,000
40,000
60,000
80,000
100,000
120,000
140,000
160,000
18-24 25-34 35-44 45-54 55-64 65+
Wage DifferentialsEducation Levels and Individual Annual Earnings
EducationalAttainment
An
nu
al E
arn
ing
s (
Th
ou
san
ds
of
Do
llar
s)
Age
Professional Degree
Bachelor’s Degree
Associate’s Degree
High School Diploma
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Wage Differentials
• Marginal Revenue• Market Imperfections
– Lack of Job Information– Geographic Immobility– Unions and Government Restraints– Discrimination