Wage Determination
Chapter 13
McGraw-Hill/Irwin
Copyright 2009 by The McGraw-Hill Companies, Inc. All rights reserved.
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
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
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
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
Real Wages
Long run trend of average real wages in the U.S.
Variation
Real Wage Rate (Dollars)
across occupations
S2020 S2000 S1900
S1950
D1950 D1900
D2000
D2020
Quantity of Labor
13-6
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
Competitive Labor Market
Labor Market
S
Wage Rate (Dollars) Wage Rate (Dollars)
Individual Firm
a
($10) WC
($10) WC
s=MRC
D=MRP ( mrps)
0 QC
(1000)
c
qC
(5)
d=mrp
Quantity of Labor
Quantity of Labor
13-8
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
Monopsony Model
MRC S
Wage Rate (Dollars)
b
Wc Wm
a c
MRP
Qm
Qc
Quantity of Labor
Examples of monopsony power
13-10
Demand Enhancement Model
Union model
Increase product demand Alter price of other inputs
Wage Rate (Dollars)
Wu Wc
Increase In Demand
D2
D1
Qc Qu
13-11
Quantity of Labor
Craft Union Model
Effectively reduce supply labor
Restrict
immigration Reduce child labor Compulsory retirement Shorter workweek
Exclusive unionism Occupational licensing
13-12
Craft Union Model
S2 Wage Rate (Dollars)
S1
Wu Wc
Decrease In Supply
D
Qu Qc
13-13
Quantity of Labor
Industrial Union Model
Inclusive unionism
Auto
Wage Rate (Dollars)
and steel workers
S
Wu Wc
b e
D
Qu Qc Qe
Quantity of Labor
13-14
Union Models
Are unions successful? Wages 15% higher on average Consequences:
Higher
unemployment Restricted ability to demand higher wages
13-15
Bilateral Monopoly
Monopsony and inclusive unionism Single buyer and seller Not uncommon Indeterminate outcome Desirability
13-16
Bilateral Monopoly
MRC Wage Rate (Dollars)
Wu Wc Wm
D=MRP
Qu=Qm
Qc
13-17
Quantity of Labor
Minimum Wage
Case against minimum wage Case for minimum wage State and locally set rates Evidence and conclusions
13-18
Wage Differentials
Average Annual Wages, 2007
Occupation 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 Annual Average Wages $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
Source: Bureau of Labor Statistics, 2006 13-19
Labor Supply and Demand
Differences across occupations Explains wage differentials Marginal revenue productivity Noncompeting groups Ability Education and training Compensating differences
13-20
Education and Annual Earnings
160,000
Annual Earnings (Thousands of Dollars)
140,000 120,000
Educational Attainment
Professional Degree
100,000 80,000 60,000 40,000 20,000 0 18-24 25-34 35-44 45-54 55-64 65+
13-21
Bachelors Degree Associates Degree
High School Diploma
Age
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
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
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
Key Terms
wage rate nominal wage real wage
minimum wage wage differentials marginal revenue productivity noncompeting groups human capital
purely competitive labor market
monopsony
exclusive unionism
occupational licensing
compensating differences
incentive pay plan
inclusive unionism
bilateral monopoly
13-25
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Rent, Interest, and Profit
13-26
