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Wage Determination and Labor Market: Exploring the Factors Influencing Wages

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  1. Chapter 17 Wage Determination

  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 • LO1

  3. Wages of Production Workers • LO1

  4. Role of Productivity • Labor demand depends on productivity • U.S. labor is highly productive • Plentiful capital • Access to abundant natural resources • Advanced technology • Labor quality • Other factors • LO1

  5. Real Wages and Output • LO1

  6. Real Wages and Productivity • 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 • LO1

  7. Competitive Labor Market • Purely 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 LO2

  8. Labor Market and the Firm Labor Market Individual Firm a S b e s = MRC Wage Rate (Dollars) Wage Rate (Dollars) ($10) WC ($10) WC D = MRP (∑ mrp’s) d = mrp c 0 0 qC QC (5) (1000) Quantity of Labor Quantity of Labor LO2

  9. Competition in Hiring Labor LO2

  10. Monopsony • Monopsony • Employer has buying power • Characteristics • Single buyer • Labor immobile • Firm is a “wage maker” • Upsloping labor supply to firm • MRC higher than wage rate LO3

  11. Monopsony Model MRC S b Wage Rate (Dollars) a Wc Wm c MRP 0 Qc Qm Quantity of Labor LO3

  12. Monopsony in Hiring LO3

  13. Monopsony Power • Maximize profit by hiring smaller number of workers • Examples of monopsony power • Nurses • Professional Athletes • Teachers LO3

  14. Demand Enhancement Model • Union model that seeks to increase the demand for labor S Increase In Demand Wage Rate (Dollars) Wu Wc D2 D1 Qc Qu Quantity of Labor LO4

  15. Craft Unions • Effectively reduce supply of labor • Restrict immigration • Reduce child labor • Encourage compulsory retirement • Enforce a shorter workweek • Exclusive unionism • Occupational licensing LO4

  16. Craft Union Model S2 S1 Wage Rate (Dollars) Decrease In Supply Wu Wc D Qu Qc Quantity of Labor LO4

  17. Industrial Union Model • Inclusive unionism • Auto and steel workers S b a Wage Rate (Dollars) Wu e Wc D Qu Qe Qc Quantity of Labor LO4

  18. Wage Increases and Job Loss • Are unions successful? • Wages 15% higher on average • Consequences • Higher unemployment • Restricted ability to demand higher wages LO4

  19. Bilateral Monopoly • Bilateral monopoly • Monopsony and inclusive unionism • Single buyer and seller • Not uncommon • Indeterminate outcome LO5

  20. Bilateral Monopoly Model S MRC Wu Wage Rate (Dollars) a Wc Wm D = MRP Qu = Qm Qc Quantity of Labor LO5

  21. The Minimum Wage Controversy • Case against minimum wage • Case for minimum wage • State and locally set rates • Evidence and conclusions LO6

  22. Wages by Occupation LO7

  23. Wage Differentials W W Sa Sb Wa (b) (a) Da Wb Db 0 Qa Q 0 Qb Q W W Sc (c) (d) Wc Sd Wd Dc Dd 0 0 Qc Q Qd Q LO7

  24. Wage Differences • Wage differences across occupations • What explains wage differentials • Marginal revenue productivity • Noncompeting groups • Skills • Education and training • Human capital • Compensating differences LO7

  25. Education and Earnings LO7

  26. Other Reasons • Workers prevented from moving to higher paying jobs • Market imperfections • Lack of job information • Geographic immobility • Unions and government restraints • Discrimination LO7

  27. 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 LO8

  28. Occupational Licensing • Makes sense for doctors and EMTs • But interior designers? • Nearly 1 in 3 jobs today require a license • Restricts competition and increases price • Burden on consumers and workers • Low-wage jobs like cosmetology, childcare, floristry, massage therapy, and travel agency require licenses today

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