McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.
WageDetermination
Chapter 13
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 WorkersHourly Pay in U.S. Dollars, 2006
Source: U.S. Bureau of Labor Statistics, 2006
GermanySweden
SwitzerlandUnited Kingdom
AustraliaCanada
ItalyFrance
United StatesJapanSpainKorea
TaiwanMexico
0 5 10 15 20 25 30 35
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.–Variation across occupations
Rea
l Wag
e R
ate
(Dol
lars
)
Quantity of Labor
D1900
S1900
D1950
D2000D2020
S1950
S2000
S2020
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
Wag
e R
ate
(Dol
lars
)
Wag
e R
ate
(Dol
lars
)
($10)WC
($10)WC
Labor Market Individual Firm
Quantity of Labor Quantity of Labor
QC(1000)
0 0
D=MRP(∑ mrp’s) d=mrp
qC(5)
s=MRC
S
e
c
b
a
Competitive Labor Market
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
Wag
e R
ate
(Dol
lars
)
Quantity of Labor
0
S
MRP
MRC
c
b
aWc
Wm
Qm Qc
• Examples of monopsony power
Monopsony Model
13-10
Demand Enhancement Model• Union model
–Increase product demand–Alter price of other inputs
Wag
e R
ate
(Dol
lars
)
Quantity of Labor
Wu
Qc Qu
Wc
D1
D2
S
IncreaseIn Demand
13-11
Craft Union Model
• Effectively reduce supply labor–Restrict immigration–Reduce child labor–Compulsory retirement–Shorter workweek
• Exclusive unionism• Occupational licensing
13-12
Wag
e R
ate
(Dol
lars
)
Quantity of Labor
D
S1
Qc
Wc
S2
Wu
Qu
DecreaseIn Supply
Craft Union Model
13-13
Industrial Union Model• Inclusive unionism
–Auto and steel workersW
age
Rat
e (D
olla
rs)
Quantity of Labor
D
S
Qc
Wc
Wu
Qu Qe
a be
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
Wag
e R
ate
(Dol
lars
)
Quantity of Labor
D=MRP
S
Qc
Wc
Wu
Qu=Qm
MRC
Wm
a
13-17
Minimum Wage
• Case against minimum wage• Case for minimum wage• State and locally set rates• Evidence and conclusions
13-18
Wage DifferentialsAverage Annual Wages, 2007
SurgeonsAircraft PilotsPetroleum EngineersFinancial ManagersLaw ProfessorsChemical EngineersDental HygienistsRegistered NursesPolice OfficersElectriciansTravel AgentsBarbersRetail SalespersonsRecreation WorkersTeacher AidesFast Food Cooks
$191,410148,810113,890106,20095,51084,24064,91062,48050,67048,10032,19025,86024,53023,79022,82016,860
Source: Bureau of Labor Statistics, 2006
Occupation Annual Average Wages
13-19
Labor Supply and Demand
• Differences across occupations• Explains wage differentials• Marginal revenue productivity• Noncompeting groups
–Ability–Education and training
• Compensating differences13-20
Education and Annual Earnings
0
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+
EducationalAttainment
Ann
ual E
arni
ngs
(Tho
usan
ds o
f Dol
lars
)
Age
Professional Degree
Bachelor’s Degree
Associate’s Degree
High School Diploma
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
• nominal wage
• real wage
• purely competitive labor market
• monopsony
• exclusive unionism
• occupational licensing
• inclusive unionism
• bilateral monopoly
• minimum wage
• wage differentials
• marginal revenue productivity
• noncompeting groups
• human capital
• compensating differences
• incentive pay plan
13-25
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Rent, Interest,and Profit
13-26