1. 26 Wage Determination

2. Chapter Objectives • Why Labor Productivity and Real Hourly Compensation Track So Closely Over Time • How Wage Rates and Employment Levels are Determined in Competitive Labor Markets • How Monopsony Can Reduce Wages Below Competitive Levels • How Unions Can Increase Wage Rates • The Major Causes of Wage Differentials • The Types, Benefits, and Costs of “Pay-for-Performance” Plans

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

4. GLOBAL PERSPECTIVE Labor Wages and Earnings Hourly Wages of Production Workers Selected Nations Hourly Pay in U.S. Dollars, 2004 0 5 10 15 20 25 30 35 33.75 Denmark Germany Switzerland Sweden United Kingdom France United States Australia Japan Canada Italy Korea Taiwan Mexico 32.53 30.26 28.42 24.71 23.89 23.17 23.09 21.90 21.42 20.48 11.52 5.97 2.50 Source: U.S. Bureau of Labor Statistics, 2006

5. GLOBAL PERSPECTIVE Labor Wages and Earnings Source: U.S. Bureau of Labor Statistics, 2006

6. Real Wages and Productivity • Secular Growth of Real Wages • Long Run Trend of Real Wages in the U.S. S2020 S2000 S1950 S1900 Real Wage Rate (Dollars) D2020 D2000 D1950 D1900 Quantity of Labor

7. Purely Competitive Labor Market • Market Demand for Labor • Market Supply for Labor • Labor Market Equilibrium • MRP = MRC Rule Graphically…

8. G 26.1 Purely Competitive Labor Market Labor Market Individual Firm a S b e s=MRC Wage Rate (Dollars) Wage Rate (Dollars) ($10) WC ($10) WC D=MRP (∑ mrps) d=mrp c 0 0 qC QC (5) (1000) Quantity of Labor Quantity of Labor

9. O 26.1 G 26.2 Monopsony Model • Monopsony • Upward-Sloping Labor Supply to Firm • MRC Higher Than the Wage Rate • Equilibrium Wage and Employment Graphically…

10. W 26.1 Monopsony Model Monopsonistic Labor Market MRC S b a Wage Rate (Dollars) Wc Wm c MRP 0 Qc Qm Quantity of Labor Examples of Monopsony Power

11. Three Union Models • Demand Enhancement Model • Increase Product Demand • Increase Productivity • Alter the Price of Other Inputs S Increase In Demand Wu Wage Rate (Dollars) Wc D2 D1 Qu Qc Quantity of Labor

12. Three Union Models • Exclusive or Craft Union Model • Restricted Immigration • Reduced Child Labor • Encouraged Compulsory Retirement • Shorter Hour Workweek • Exclusive Unionism • Occupational Licensing Graphically…

13. Three Union Models • Exclusive or Craft Union Model S2 S1 Wage Rate (Dollars) Decrease In Supply Wu Wc D Qu Qc Quantity of Labor

14. Three Union Models • Inclusive or Industrial Union Model • Inclusive Unionism S b a Wage Rate (Dollars) Wu e Wc D Qu Qe Qc Quantity of Labor

15. Three Union Models • Wage Increases and Unemployment • Average 15% Higher Wages • Reduced Employment Levels Corrected by: • Growth • Elasticity

16. Bilateral Monopoly • Indeterminate Outcome • Desirability of Bilateral Monopoly S MRC Wage Rate (Dollars) Wu a Wc Wm D=MRP Qu=Qm Qc Quantity of Labor

17. Minimum Wage • Case Against the Minimum Wage • Case For the Minimum Wage • State and Locally Set Rates • Evidence and Conclusions

18. Annual Average Wages Occupation Wage Differentials Average Annual Wages in Selected Occupations, 2005 $177,690 135,040 97,350 96,620 95,570 79,230 60,620 56,880 47,270 45,630 37,750 24,700 23,170 22,420 21,100 15,500 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 Source: Bureau of Labor Statistics, 2006

19. O 26.2 Wage Differentials • Marginal Revenue Productivity • Noncompeting Groups • Ability • Education and Training • Human Capital • Compensating Differences

20. Wage Differentials Education Levels and Individual Annual Earnings Educational Attainment Professional Degree Annual Earnings (Thousands of Dollars) Bachelor’s Degree Associate’s Degree High School Diploma Age

21. Wage Differentials • Marginal Revenue • Market Imperfections • Lack of Job Information • Geographic Immobility • Unions and Government Restraints • Discrimination

22. O 26.3 O 26.4 Pay for Performance • The Principal-Agent Problem Revisited • Incentive Pay Plan • Piece Rates • Commissions or Royalties • Bonuses, Stock Options, and Profit Sharing • Efficiency Wages • Negative Side-Effects of Pay for Performance

23. Are Chief Executive Officers (CEOs) Overpaid? Last Word • Current U.S. CEO Salaries are High Relative to Domestic or Foreign Firms • Several Possible Reasons • Marginal Productivity Impact by Good Decisions • Top Salaries Like “Prize” Goals for all to Have as a Goal Impacting Many Jobs • High Salary Bias by Board Members Due to their Own Previous Performances • Some Argue High Salaries are Unjustified and are Unfair to Stockholders

24. 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 Key Terms

25. Next Chapter Preview… Rent, Interest, and Profit Chapter 27!