2. 15 - 1 Copyright 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 Previous Slide Next Slide End Show Wage Determination HELP WANTED 15 C H A P T E R

3. 15 - 2 Copyright 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 Previous Slide Next Slide End Show Wages Defined... Wages - - Salary - - Earnings Wage Rate Nominal Wages Real Wages International differences... LABOR, WAGES, AND EARNINGS

4. 15 - 3 Copyright 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 Previous Slide Next Slide End Show 0 5 10 15 20 25 Germany Denmark Switzerland United States Japan Sweden United Kingdom France Canada Italy Australia Korea Taiwan Mexico GLOBAL PERSPECTIVE Hourly Wages of Production Workers, Selected Nations Source: U.S. Bureau of Labor Statistics, 2003 Hourly Pay in U.S. Dollars, 2001

5. 15 - 4 Copyright 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 Previous Slide Next Slide End Show GENERAL LEVEL OF WAGES Role of Productivity Plentiful Capital Access to Abundant Natural Resources Advanced Technology Labor Quality Other Factors

6. 15 - 5 Copyright 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 Previous Slide Next Slide End Show REAL WAGES AND PRODUCTIVITY Growth in real income (earnings) Growth in output per worker-hour Can only grow at about the same rate! Secular Growth of Real Wages

7. 15 - 6 Copyright 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 Previous Slide Next Slide End Show PURELY COMPETITIVE LABOR MARKET Purely competitive labor market: Many Firms Numerous Qualified Workers “Wage Taker” Behavior Market Demand for Labor Market Supply of Labor

8. 15 - 7 Copyright 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 Previous Slide Next Slide End Show Non- Labor Costs Labor Costs PURELY COMPETITIVE LABOR MARKET EQUILIBRIUM Labor Market S D = MRP (  mrp’s) WcWc (1000) Individual Firm S = MRC d = mrp WcWc Quantity of Labor Wage Rate (dollars) Quantity of Labor ($10) (5) $10 Includes Normal Profit

9. 15 - 8 Copyright 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 Previous Slide Next Slide End Show Non- Labor Costs Labor Costs Includes Normal Profit Labor Market S D = MRP (  mrp’s) WcWc (1000) Individual Firm S = MRC d = mrp WcWc Quantity of Labor Wage Rate (dollars) Quantity of Labor ($10) (5) $10 Marginal Resource Cost (MRC) will be constant and equal to resource price (the wage rate). PURELY COMPETITIVE LABOR MARKET EQUILIBRIUM

10. 15 - 9 Copyright 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 Previous Slide Next Slide End Show MONOPSONY MODEL Single Buyer of a type of labor The type of labor is relatively immobile “Wage Maker” Behavior Upward-Sloping Supply Curve to Firm

11. 15 - 10 Copyright 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 Previous Slide Next Slide End Show Wage Rate (dollars) S Quantity of Labor MONOPSONISTIC LABOR MARKET In monopsony MRC lies above the supply curve.

12. 15 - 11 Copyright 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 Previous Slide Next Slide End Show Wage Rate (dollars) MRP S WmWm Quantity of Labor MRC QmQm MONOPSONISTIC LABOR MARKET MRP = MRC Q m units of labor hired

13. 15 - 12 Copyright 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 Previous Slide Next Slide End Show Wage Rate (dollars) MRP S WmWm Quantity of Labor MRC WcWc QmQm QcQc The competitive solution would result in a higher wage and greater Employment. MONOPSONISTIC LABOR MARKET

14. 15 - 13 Copyright 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 Previous Slide Next Slide End Show Wage Rate (dollars) MRP S WmWm Quantity of Labor MRC WcWc QmQm QcQc The competitive solution would result in a higher wage and greater employment MONOPSONISTIC LABOR MARKET Monopsonists maximize profits by hiring a smaller number of workers and thereby paying a less-than- competitive wage rate.

15. 15 - 14 Copyright 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 Previous Slide Next Slide End Show Wage Rate (dollars) D1D1 S Quantity of Labor WcWc QcQc THREE UNION MODELS Demand-Enhancement Model

16. 15 - 15 Copyright 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 Previous Slide Next Slide End Show WuWu QuQu Wage Rate (dollars) D1D1 S Quantity of Labor WcWc QcQc D2D2...by increasing product demand THREE UNION MODELS Demand-Enhancement Model

17. 15 - 16 Copyright 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 Previous Slide Next Slide End Show WuWu QuQu Wage Rate (dollars) D1D1 S Quantity of Labor WcWc QcQc D2D2...by increasing product demand...by increasing productivity THREE UNION MODELS Demand-Enhancement Model

18. 15 - 17 Copyright 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 Previous Slide Next Slide End Show WuWu QuQu Wage Rate (dollars) D1D1 S Quantity of Labor WcWc QcQc D2D2...by increasing product demand...by increasing productivity...by increasing the price of substitutes THREE UNION MODELS Demand-Enhancement Model

19. 15 - 18 Copyright 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 Previous Slide Next Slide End Show Wage Rate (dollars) D Quantity of Labor WcWc QcQc THREE UNION MODELS Exclusive or Craft Model S1S1

20. 15 - 19 Copyright 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 Previous Slide Next Slide End Show WuWu Wage Rate (dollars) D Quantity of Labor WcWc QcQc THREE UNION MODELS Exclusive or Craft Model QuQu S1S1...restrictive membership policies S2S2

21. 15 - 20 Copyright 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 Previous Slide Next Slide End Show WuWu Wage Rate (dollars) D Quantity of Labor WcWc QcQc THREE UNION MODELS Exclusive or Craft Model QuQu S1S1...restrictive membership policies...restricting labor supply of the economy as a whole S2S2

22. 15 - 21 Copyright 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 Previous Slide Next Slide End Show WuWu Wage Rate (dollars) D Quantity of Labor WcWc QcQc THREE UNION MODELS Exclusive or Craft Model QuQu S1S1...restrictive membership policies...restricting labor supply of the economy as a whole …occupational licensing S2S2

23. 15 - 22 Copyright 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 Previous Slide Next Slide End Show Wage Rate (dollars) Quantity of Labor WcWc QcQc THREE UNION MODELS Inclusive or Industrial Model D S...by organizing virtually all workers and thereby control of the supply curve for labor causing…

24. 15 - 23 Copyright 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 Previous Slide Next Slide End Show WuWu Wage Rate (dollars) D Quantity of Labor WcWc QcQc THREE UNION MODELS Inclusive or Industrial Model QuQu D...by organizing virtually all workers and thereby control of the supply curve for labor causing… S QeQe

25. 15 - 24 Copyright 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 Previous Slide Next Slide End Show WAGE INCREASES AND UNEMPLOYMENT Union members receive about 15% higher wages Negative impact on level of employment Negative unemployment effect reduced by: Growth Elasticity

26. 15 - 25 Copyright 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 Previous Slide Next Slide End Show BILATERAL MONOPOLY MODEL Monopsonist & Union Seek Different Wage Rates... …economic theory cannot determine the actual outcome. MRC WuWu Wage Rate (dollars) D Quantity of Labor WcWc QcQc D=MRP S Q u =Q m WmWm

27. 15 - 26 Copyright 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 Previous Slide Next Slide End Show MRC WuWu Wage Rate (dollars) D Quantity of Labor WcWc QcQc BILATERAL MONOPOLY MODEL Monopsonist & Union Seek Different Wage Rates... D=MRP S …economic theory cannot determine the actual outcome. Q u =Q m WmWm Desirability of Bilateral Monopoly

28. 15 - 27 Copyright 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 Previous Slide Next Slide End Show MINIMUM WAGE CONTROVERSY Case Against Minimum Wage Case For Minimum Wage Evidence and Conclusions

29. 15 - 28 Copyright 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 Previous Slide Next Slide End Show WAGE DIFFERENTIALS Marginal Revenue Productivity Noncompeting Groups Ability Education and Training Investment in Human Capital

30. 15 - 29 Copyright 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 Previous Slide Next Slide End Show WAGE DIFFERENTIALS Compensating Differences Nonmonetary Differences Market Imperfections Lack of Job Information Geographical Immobility Unions & Government Restraints Discrimination

31. 15 - 30 Copyright 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 Previous Slide Next Slide End Show PAY FOR PERFORMANCE The Principal-Agent Problem Incentive Pay Plan Piece Rates Commissions or Royalties Bonuses, Stock Options, & Profit Sharing Efficiency Wages

32. 15 - 31 Copyright 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 Previous Slide Next Slide End Show PAY FOR PERFORMANCE Negative 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

33. 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 investment in human capital compensating differences incentive pay plan ENDBACK Copyright McGraw-Hill/Irwin, Inc. 2005

34. 15 - 33 Copyright 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 Previous Slide Next Slide End Show Next: Rent, Interest, and Profit Chapter 16