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Wage Determination and Labor Market: Exploring the Factors Influencing Wages

This chapter delves into wage determination and labor market dynamics, examining factors such as productivity, competition, monopsony power, unions, wage differentials, education, and occupational licensing. It also explores the minimum wage controversy and pay-for-performance incentives.

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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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