2. LABOR, WAGES, AND EARNINGS
Wages Defined...
Wages - - Salary - - Earnings
Wage Rate
Nominal Wages
Real Wages
International differences...
3. GLOBAL PERSPECTIVE
Hourly Wages of Production Workers,
Selected Nations
Hourly Pay in U.S. Dollars, 2001
0 5 10 15 20 25
Germany
Denmark
Switzerland
United States
Japan
Sweden
United Kingdom
France
Canada
Italy
Australia
Korea
Taiwan
Mexico
Source: U.S. Bureau of Labor Statistics, 2003
4. GENERAL LEVEL OF WAGES
Role of Productivity
• Plentiful Capital
• Access to Abundant
Natural Resources
• Advanced
Technology
• Labor Quality
5. REAL WAGES AND
PRODUCTIVITY
Growth in real income (earnings)
Growth in output per worker-hour
Can only grow at
about the same rate!
6. PURELY COMPETITIVE
LABOR MARKET
Purely competitive labor marke
Many Firms
Numerous Qualified Worker
“Wage Taker” Behavior
7. PURELY COMPETITIVE LABOR
MARKET EQUILIBRIUM
S
Includes
Normal
Profit
Wage Rate (dollars)
Non-
Labor
Costs S = MRC
Wc $10 Wc ($10)
Labor
D = MRP
Costs
( mrp’s)
d = mrp
(1000) (5)
Quantity of Labor Quantity of Labor
Labor Market Individual Firm
8. PURELY COMPETITIVE LABOR
MARKET EQUILIBRIUM
S
Includes
Normal
Marginal Resource Profit
Wage Rate (dollars)
Cost (MRC) will be
Non-
Labor
Wc
constant and W Costs to
$10
equal c
S = MRC
($10)
resource price
(the wage rate)
D = MRP
Labor
Costs
( mrp’s)
d = mrp
(1000) (5)
Quantity of Labor Quantity of Labor
Labor Market Individual Firm
9. MONOPSONY MODEL
• Single Buyer of a type
of labor
• The type of labor is
relatively immobile
“Wage Maker”
Behavior
Upward-Sloping Supply
Curve to Firm
10. MONOPSONISTIC
LABOR MARKET
S
Wage Rate (dollars)
In monopsony
MRC lies above
the supply curve.
Quantity of Labor
11. MONOPSONISTIC
LABOR MARKET
MRC
S
Wage Rate (dollars)
MRP = MRC
Wm
MRP
Qm units of
labor hired
Qm
Quantity of Labor
12. MONOPSONISTIC
LABOR MARKET
MRC
S
The competitive
Wage Rate (dollars)
solution would
result in a higher
Wc wage and greater
Wm employment.
MRP
Qm Qc
Quantity of Labor
13. MONOPSONISTIC
LABOR MARKET
MRC
S
Monopsonists maximize
The competitive
Wage Rate (dollars)
profits by hiring a smaller
solution would
number of workers anda higher
result in
Wc wage and greater
thereby paying a less-than-
Wm employment
competitive wage rate.
MRP
Qm Qc
Quantity of Labor
14. THREE UNION MODELS
Demand-Enhancement Model
S
Wage Rate (dollars)
Wc
D1
Qc
Quantity of Labor
15. THREE UNION MODELS
Demand-Enhancement Model increasing
...by
product demand
S
Wage Rate (dollars)
Wu
Wc
D2
D1
Qc Qu
Quantity of Labor
16. THREE UNION MODELS
Demand-Enhancement Model increasing
...by
product demand
...by increasing
S productivity
Wage Rate (dollars)
Wu
Wc
D2
D1
Qc Qu
Quantity of Labor
17. THREE UNION MODELS
Demand-Enhancement Model increasing
...by
product demand
...by increasing
S productivity
...by increasing
the price of
substitutes
Wage Rate (dollars)
Wu
Wc
D2
D1
Qc Qu
Quantity of Labor
18. THREE UNION MODELS
Exclusive or Craft Model
S1
Wage Rate (dollars)
Wc
D
Qc
Quantity of Labor
19. THREE UNION MODELS
Exclusive or Craft Model ...restrictive
membership
S2
policies
S1
Wage Rate (dollars)
Wu
Wc
D
Qu Qc
Quantity of Labor
20. THREE UNION MODELS
Exclusive or Craft Model ...restrictive
membership
S2
policies
S1 ...restricting
labor supply of
the economy as
a whole
Wage Rate (dollars)
Wu
Wc
D
Qu Qc
Quantity of Labor
21. THREE UNION MODELS
Exclusive or Craft Model ...restrictive
membership
S2
policies
S1 ...restricting
labor supply of
the economy as
a whole
Wage Rate (dollars)
…occupational
licensing
Wu
Wc
D
Qu Qc
Quantity of Labor
22. THREE UNION MODELS
Inclusive or Industrial Model
...by organizing
virtually all
S workers and
thereby control
of the supply
curve for labor
Wage Rate (dollars)
causing…
Wc
D
Qc
Quantity of Labor
23. THREE UNION MODELS
Inclusive or Industrial Model
...by organizing
virtually all
S workers and
thereby control
of the supply
curve for labor
Wage Rate (dollars)
causing…
Wu
Wc
D
Qu Qc Qe
Quantity of Labor
24. WAGE INCREASES
AND UNEMPLOYMENT
• Union members receive
about 15% higher wages
• Negative impact on level
of employment
Negative unemployment
effect reduced by:
Growth
Elasticity
25. BILATERAL MONOPOLY MODEL
Monopsonist & Union Seek
Different Wage Rates...
MRC
S
…economi
c theory
Wage Rate (dollars)
cannot
Wu determine
Wc the actual
Wm outcome.
D
D=MRP
Qu=Qm Qc
Quantity of Labor
26. BILATERAL MONOPOLY MODEL
Monopsonist & Union Seek
Different Wage Rates...
MRC
S
…economi
c theory
Wage Rate (dollars)
cannot
Wu determine
Wc the actual
Wm outcome.
D
D=MRP
Desirability =Q Bilateral Monopoly
Q
of Q
u m c
Quantity of Labor
27. MINIMUM WAGE
CONTROVERSY
•Case Against
Minimum Wage
•Case For Minimum
Wage
•Evidence and
Conclusions
30. PAY FOR PERFORMANCE
The Principal-Agent
Problem
Incentive Pay Plan
• Piece Rates
• Commissions or
Royalties
• Bonuses, Stock Options,
31. PAY FOR PERFORMANCE
Negative Side-Effects of
Pay for Performance
•Poor Product Quality
•Questionable or
Fraudulent Sales
Practices
•Disruption of Teamwork
•Free Ride by Low
Producers
•Low Turnover Decreases
32. wage rate bilateral monopoly
nominal wage minimum wage
real wage wage differentials
purely competitive labor marginal revenue
market productivity
monopsony noncompeting groups
exclusive unionism investment in human capital
occupational licensing compensating differences
inclusive unionism incentive pay plan
Copyright McGraw-Hill/Irwin, Inc. 2005 BACK END
