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

2. 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

3. 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

4. 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

5. Real Wages and Productivity
LO1
13-5

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
LO2
13-6

7. 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

8. 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

9. 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

10. 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

11. 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

12. 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

13. 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

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

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

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

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

18. Wage Differentials
LO5
13-18

19. 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

20. 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