15 - 1 Copyright McGraw-Hill/Irwin, 2005 Labor, Wages, and Earnings General Level of Wages Real...

15 - 1Copyright McGraw-Hill/Irwin, 2005

Labor, Wages, and Earnings

General Level of Wages

Real Wages and Productivity

Purely Competitive Labor Market

Monopsony Model

Three Union Models

Bilateral Monopoly Model

Minimum Wage Controversy

Wage Differentials

Pay For Performance

Key Terms

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Wage Determination

HELP

WANTED

15C H A P T E R






Monopsony Model

Three Union Models



Wage Differentials

Pay For Performance

Key Terms

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Wages Defined...Wages - - Salary - - Earnings

Wage RateNominal WagesReal Wages

International differences...

LABOR, WAGES, AND EARNINGS






Monopsony Model

Three Union Models



Wage Differentials

Pay For Performance

Key Terms

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0 5 10 15 20 25GermanyDenmark

SwitzerlandUnited States

JapanSweden

United KingdomFrance

CanadaItaly

AustraliaKorea

TaiwanMexico

GLOBAL PERSPECTIVEHourly Wages of Production Workers,Selected Nations

Source: U.S. Bureau of Labor Statistics, 2003

Hourly Pay in U.S. Dollars, 2001






Monopsony Model

Three Union Models



Wage Differentials

Pay For Performance

Key Terms

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GENERAL LEVEL OF WAGES

Role of Productivity• Plentiful Capital• Access to Abundant Natural Resources

• Advanced Technology• Labor Quality• Other Factors






Monopsony Model

Three Union Models



Wage Differentials

Pay For Performance

Key Terms

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REAL WAGES ANDPRODUCTIVITY

Growth in real income (earnings)

Growth in output per worker-hour

Can only grow at

about the same rate!

Secular Growth of Real Wages






Monopsony Model

Three Union Models



Wage Differentials

Pay For Performance

Key Terms

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PURELY COMPETITIVELABOR MARKET

Purely competitive labor market:

Many Firms

Numerous Qualified Workers

“Wage Taker” Behavior

Market Demand for Labor

Market Supply of Labor






Monopsony Model

Three Union Models



Wage Differentials

Pay For Performance

Key Terms

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Non-LaborCosts

LaborCosts

PURELY COMPETITIVE LABORMARKET EQUILIBRIUM

Labor Market

S

D = MRP( mrp’s)

Wc

(1000)

Individual Firm

S = MRC

d = mrp

Wc

Quantity of Labor

Wa

ge

Ra

te (

do

llars

)

Quantity of Labor

($10)

(5)

$10 $10 $10 $10 $10 $10

IncludesNormalProfit






Monopsony Model

Three Union Models



Wage Differentials

Pay For Performance

Key Terms

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Non-LaborCosts

LaborCosts

IncludesNormalProfit

Labor Market

S

D = MRP( mrp’s)

Wc

(1000)

Individual Firm

S = MRC

d = mrp

Wc

Quantity of Labor

Wa

ge

Ra

te (

do

llars

)

Quantity of Labor

($10)

(5)

$10 $10 $10 $10 $10 $10

Marginal ResourceCost (MRC) will be

constant and equal toresource price(the wage rate).

PURELY COMPETITIVE LABORMARKET EQUILIBRIUM






Monopsony Model

Three Union Models



Wage Differentials

Pay For Performance

Key Terms

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MONOPSONY MODEL

•Single Buyer of a type of labor

•The type of labor is relatively immobile “Wage Maker” Behavior

Upward-Sloping SupplyCurve to Firm






Monopsony Model

Three Union Models



Wage Differentials

Pay For Performance

Key Terms

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Wa

ge

Ra

te (

do

llars

)S

Quantity of Labor

MONOPSONISTICLABOR MARKET

In monopsonyMRC lies abovethe supply curve.






Monopsony Model

Three Union Models



Wage Differentials

Pay For Performance

Key Terms

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Wa

ge

Ra

te (

do

llars

)

MRP

S

Wm

Quantity of Labor

MRC

Qm


MRP = MRC

Qm units oflabor hired






Monopsony Model

Three Union Models



Wage Differentials

Pay For Performance

Key Terms

PreviousSlide

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Wa

ge

Ra

te (

do

llars

)

MRP

S

Wm

Quantity of Labor

MRC

Wc

Qm Qc

The competitivesolution would

result in a higherwage and greater

Employment.







Monopsony Model

Three Union Models



Wage Differentials

Pay For Performance

Key Terms

PreviousSlide

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Wa

ge

Ra

te (

do

llars

)

MRP

S

Wm

Quantity of Labor

MRC

Wc

Qm Qc

The competitivesolution would

result in a higherwage and greater

employment


Monopsonists maximizeprofits by hiring a smaller

number of workers andthereby paying a less-than-

competitive wage rate.






Monopsony Model

Three Union Models



Wage Differentials

Pay For Performance

Key Terms

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Wag

e R

ate

(do

llar

s)

D1

S

Quantity of Labor

Wc

Qc

THREE UNION MODELSDemand-Enhancement Model






Monopsony Model

Three Union Models



Wage Differentials

Pay For Performance

Key Terms

PreviousSlide

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Wu

Qu

Wag

e R

ate

(do

llar

s)

D1

S

Quantity of Labor

Wc

Qc

D2

...by increasingproduct demand







Monopsony Model

Three Union Models



Wage Differentials

Pay For Performance

Key Terms

PreviousSlide

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Wu

Qu

Wag

e R

ate

(do

llar

s)

D1

S

Quantity of Labor

Wc

Qc

D2

...by increasingproduct demand...by increasingproductivity







Monopsony Model

Three Union Models



Wage Differentials

Pay For Performance

Key Terms

PreviousSlide

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Wu

Qu

Wag

e R

ate

(do

llar

s)

D1

S

Quantity of Labor

Wc

Qc

D2

...by increasingproduct demand...by increasingproductivity...by increasingthe price ofsubstitutes







Monopsony Model

Three Union Models



Wage Differentials

Pay For Performance

Key Terms

PreviousSlide

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EndEndShowShow

Wag

e R

ate

(do

llar

s)

D

Quantity of Labor

Wc

Qc

THREE UNION MODELSExclusive or Craft Model

S1






Monopsony Model

Three Union Models



Wage Differentials

Pay For Performance

Key Terms

PreviousSlide

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Wu

Wag

e R

ate

(do

llar

s)

D

Quantity of Labor

Wc

Qc


Qu

S1

...restrictive membership policies

S2






Monopsony Model

Three Union Models



Wage Differentials

Pay For Performance

Key Terms

PreviousSlide

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EndEndShowShow

Wu

Wag

e R

ate

(do

llar

s)

D

Quantity of Labor

Wc

Qc


Qu

S1

...restrictive membership policies...restricting labor supply of the economy as a whole

S2






Monopsony Model

Three Union Models



Wage Differentials

Pay For Performance

Key Terms

PreviousSlide

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Wu

Wag

e R

ate

(do

llar

s)

D

Quantity of Labor

Wc

Qc


Qu

S1

...restrictive membership policies...restricting labor supply of the economy as a whole…occupational licensing

S2






Monopsony Model

Three Union Models



Wage Differentials

Pay For Performance

Key Terms

PreviousSlide

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Wag

e R

ate

(do

llar

s)

Quantity of Labor

Wc

Qc

THREE UNION MODELSInclusive or Industrial Model

D

S

...by organizing virtually all workers and thereby control of the supply curve for labor causing…






Monopsony Model

Three Union Models



Wage Differentials

Pay For Performance

Key Terms

PreviousSlide

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EndEndShowShow

Wu

Wag

e R

ate

(do

llar

s)

D

Quantity of Labor

Wc

Qc

THREE UNION MODELSInclusive or Industrial Model

Qu

D

...by organizing virtually all workers and thereby control of the supply curve for labor causing…

S

Qe






Monopsony Model

Three Union Models



Wage Differentials

Pay For Performance

Key Terms

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WAGE INCREASESAND UNEMPLOYMENT

• Union members receive about 15% higher wages

• Negative impact on level of employment

Negative unemployment effect reduced by:

GrowthElasticity






Monopsony Model

Three Union Models



Wage Differentials

Pay For Performance

Key Terms

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BILATERAL MONOPOLY MODELMonopsonist & Union SeekDifferent Wage Rates...

…economic theorycannot

determine the actual outcome.

MRC

Wu

Wag

e R

ate

(do

llar

s)

D

Quantity of Labor

Wc

Qc

D=MRP

S

Qu=Qm

Wm






Monopsony Model

Three Union Models



Wage Differentials

Pay For Performance

Key Terms

PreviousSlide

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MRC

Wu

Wag

e R

ate

(do

llar

s)

D

Quantity of Labor

Wc

Qc

BILATERAL MONOPOLY MODELMonopsonist & Union SeekDifferent Wage Rates...

D=MRP

S

…economic theorycannot

determine the actual outcome.

Qu=Qm

Wm

Desirability of Bilateral Monopoly






Monopsony Model

Three Union Models



Wage Differentials

Pay For Performance

Key Terms

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MINIMUM WAGECONTROVERSY

•Case Against Minimum Wage•Case For Minimum

Wage•Evidence and Conclusions






Monopsony Model

Three Union Models



Wage Differentials

Pay For Performance

Key Terms

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WAGE DIFFERENTIALSMarginal Revenue Productivity

Noncompeting Groups•Ability•Education and Training

•Investment in Human Capital






Monopsony Model

Three Union Models



Wage Differentials

Pay For Performance

Key Terms

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WAGE DIFFERENTIALSCompensating Differences

•Nonmonetary DifferencesMarket Imperfections

•Lack of Job Information•Geographical Immobility•Unions & Government Restraints

•Discrimination






Monopsony Model

Three Union Models



Wage Differentials

Pay For Performance

Key Terms

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PAY FOR PERFORMANCE

The Principal-Agent Problem

Incentive Pay Plan• Piece Rates• Commissions or Royalties• Bonuses, Stock Options, &

Profit Sharing• Efficiency Wages






Monopsony Model

Three Union Models



Wage Differentials

Pay For Performance

Key Terms

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PAY FOR PERFORMANCENegative Side-Effects of Pay

for Performance•Poor Product Quality•Questionable or Fraudulent Sales Practices

•Disruption of Teamwork•Free Ride by Low Producers•Low Turnover Decreases Hiring Opportunities

wage ratenominal wagereal wagepurely competitive labor marketmonopsonyexclusive unionismoccupational licensinginclusive unionism

bilateral monopolyminimum wagewage differentialsmarginal revenue productivitynoncompeting groupsinvestment in human capitalcompensating differences incentive pay plan

ENDBACKCopyright McGraw-Hill/Irwin, Inc. 2005






Monopsony Model

Three Union Models



Wage Differentials

Pay For Performance

Key Terms

PreviousSlide

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EndEndShowShow

Next:

Rent, Interest, and Profit

Chapter 16

15 - 1 Copyright McGraw-Hill/Irwin, 2005 Labor, Wages, and Earnings General Level of Wages Real...

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