Wage Determination Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin

Labor, Wages, and Earnings Price paid for labor Direct pay plus fringe benefits Wage rate Nominal wage Real wage General level of wages LO1 13-2

Labor demand depends on productivity U.S. labor is highly productive 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 13-3

Real Wages and Productivity Long-run trend of average real wages in the U.S. S2020 S2000 S1900 S1950 Real Wage Rate (Dollars) D2020 D2000 D1950 D1900 Quantity of Labor LO1 13-4

Real Wages and Productivity LO1 13-5

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 13-6

Competitive Labor Market Wage Rate (Dollars) Labor Market Quantity of Labor Wage Rate (Dollars) Individual Firm Quantity of Labor a S e b ($10) WC s=MRC ($10) WC D=MRP (∑ mrp’s) d=mrp c QC qC (1000) (5) LO2 13-7

Employer has buying power Characteristics Single buyer Labor immobile Monopsony Model Employer has buying power Characteristics Single buyer Labor immobile Firm “wage maker” Firm labor supply is upward sloping MRC higher than wage rate Equilibrium LO3 13-8

Examples of monopsony power Monopsony Model Examples of monopsony power MRC S b Wage Rate (Dollars) a Wc Wm c MRP Qm Qc Quantity of Labor LO3 13-9

Maximize profit by hiring smaller number of workers Monopsony Power Maximize profit by hiring smaller number of workers Examples of monopsony power Nurses Professional Athletes Teachers Three union models LO3 13-10

Demand Enhancement Model Union model Increase product demand Alter price of other inputs S Increase In Demand Wage Rate (Dollars) Wu Wc D2 D1 Qc Qu Quantity of Labor LO4 13-11

Craft Union Model Wage Rate (Dollars) Quantity of Labor S2 S1 Wu Decrease In Supply Wc D Qu Qc Quantity of Labor LO4 13-12

Industrial Union Model Inclusive unionism Auto and steel workers S a b Wage Rate (Dollars) Wu e Wc D Qu Qc Qe Quantity of Labor LO4 13-13

Bilateral Monopoly Model Monopsony and inclusive unionism Single buyer and seller Not uncommon Indeterminate outcome Desirability LO4 13-14

Bilateral Monopoly Model MRC S Wu Wage Rate (Dollars) a Wc Wm D=MRP Qu=Qm Qc Quantity of Labor LO4 13-15

The Minimum Wage Controversy Case against minimum wage Case for minimum wage State and locally set rates Evidence and conclusions LO5 13-16

Differences across occupations What explains wage differentials? Marginal revenue productivity Noncompeting groups Ability Education and training Compensating differences LO5 13-17

Wage Differentials LO5 13-18

Workers prevented from moving to higher paying jobs Wage Differentials Workers prevented from moving to higher paying jobs Market imperfections Lack of job information Geographic immobility Unions and government restraints Discrimination LO5 13-19

The principal-agent problem Incentive pay plan Piece rates 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 LO6 13-20