1. Chapter 13 Wage Determination

2. 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

3. 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

4. Level of Wages Across Nations Hourly Wages of Production Workers Hourly Pay in U.S. Dollars, 2006 0 5 10 15 20 25 30 35 Germany Sweden Switzerland United Kingdom Australia Canada Italy France United States Japan Spain Korea Taiwan Mexico Source: U.S. Bureau of Labor Statistics, 2006 13-4

5. 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

6. Real Wages • Long run trend of average real wages in the U.S. • Variation across occupations S2020 S2000 S1950 S1900 Real Wage Rate (Dollars) D2020 D2000 D1950 D1900 Quantity of Labor 13-6

7. 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

8. 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 (∑ mrp’s) d=mrp c 0 0 qC QC (5) (1000) Quantity of Labor Quantity of Labor 13-8

9. 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

10. Monopsony Model MRC S b a Wage Rate (Dollars) Wc Wm c MRP 0 Qc Qm Quantity of Labor • Examples of monopsony power 13-10

11. Demand Enhancement Model • Union model • Increase product demand • Alter price of other inputs S Increase In Demand Wu Wage Rate (Dollars) Wc D2 D1 Qu Qc Quantity of Labor 13-11

12. Craft Union Model • Effectively reduce supply labor • Restrict immigration • Reduce child labor • Compulsory retirement • Shorter workweek • Exclusive unionism • Occupational licensing 13-12

13. Craft Union Model S2 S1 Wage Rate (Dollars) Decrease In Supply Wu Wc D Qu Qc Quantity of Labor 13-13

14. 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 13-14

15. Union Models • Are unions successful? • Wages 15% higher on average • Consequences: • Higher unemployment • Restricted ability to demand higher wages 13-15

16. Bilateral Monopoly • Monopsony and inclusive unionism • Single buyer and seller • Not uncommon • Indeterminate outcome • Desirability 13-16

17. Bilateral Monopoly S MRC Wage Rate (Dollars) Wu a Wc Wm D=MRP Qu=Qm Qc Quantity of Labor 13-17

18. Minimum Wage • Case against minimum wage • Case for minimum wage • State and locally set rates • Evidence and conclusions 13-18

19. Wage Differentials Annual Average Wages Occupation Average Annual Wages, 2007 $191,410 148,810 113,890 106,200 95,510 84,240 64,910 62,480 50,670 48,100 32,190 25,860 24,530 23,790 22,820 16,860 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 13-19

20. Labor Supply and Demand • Differences across occupations • Explains wage differentials • Marginal revenue productivity • Noncompeting groups • Ability • Education and training • Compensating differences 13-20

21. Education and Annual Earnings Educational Attainment Professional Degree Annual Earnings (Thousands of Dollars) Bachelor’s Degree Associate’s Degree High School Diploma Age 13-21

22. 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

23. 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

24. 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

25. 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

26. Next Chapter Preview… Rent, Interest, and Profit 13-26