1. Ch 26. Wage Determination

2. A. Wage rate B. Nominal wage C. Real wage
Real wages – adjusted for inflation.
Nominal wages – not adjusted.
-- Wage rate: price paid per unit of labor services (one hour of work).
* Labor earnings: multiply the wage rate by number of hours.
-- Nominal wage: amount of money received per hour, day, or year.
-- Real wage: quantity of goods & services a worker can obtain with nominal wages; reveals the “purchasing power” of nominal wages.

3. Labor Wages and Earnings
GLOBAL PERSPECTIVE
Hourly Wages of Production Workers
Selected Nations
Hourly Pay in U.S. Dollars, 2004
Denmark
Germany
Switzerland
Sweden
United Kingdom
France
United States
Australia
Japan
Canada
Italy
Korea
Taiwan
Mexico
33.75
32.53
30.26
28.42
24.71
23.89
23.17
23.09
21.90
21.42
20.48
11.52
5.97
2.50
Source: U.S. Bureau of Labor Statistics, 2006

4. The Role of Productivity
The demand for labor is high in the U.S. and other advanced economies because labor is productive due to:
Plentiful capital
Many natural resources
Advanced technology
Labor quality
Culture
-- Real wages in the U.S. in the long run have increased at about the same rate as increases
in output per worker.
-- Increases in productivity result partly due to increased technology.

5. Real Wages & Productivity
There’s a close long- run relationship in the U.S. between output per week and real hourly compensation (= wages & salaries + employers’ contributions to social insurance and private benefit plans).
Graph shows increases in labor supply & labor demand, resulting in a long-run, or secular, increase in wage rates and employment.

6. Real Wages and Productivity
Secular Growth of Real Wages
Long Run Trend of Real Wages in the U.S.
S2020
S2000
S1900
S1950
Real Wage Rate (Dollars)
D2020
D2000
D1950
D1900
Quantity of Labor

7. Purely Competitive Labor Market 1. MRP = MRC Rule
Now we look
at specific
wage rates
(from ch. 25)
In this market:
Firms compete for hiring specific labor.
Qualified workers supply the labor.
Individual firms and individual workers are “wage takers” since neither can exert any control over the market wage rate.
Non-labor cost
(S = MRC)
Total wage cost

8. Purely Competitive Labor Market
Market Demand for Labor
Market Supply for Labor
Labor Market Equilibrium
MRP = MRC Rule
Graphically…

9. Labor supply and labor demand in a (a) purely competitive labor market and (b) a single competitive firm.
Labor Market
Individual Firm a S e b
Wage Rate (Dollars)
($10) WC
Wage Rate (Dollars)
s=MRC
($10) WC
D=MRP
(∑ mrps)
d=mrp c QC qC
(1000)
(5)
Quantity of Labor
Quantity of Labor
PC labor market has many firms competing in hiring a specific type of labor.
Each (numerous) qualified worker w/ identical skills supplies type of labor.
Individual firms and workers are ‘wage takers’ since neither can exert any control over the market wage rate.

10. To produce, or not to produce…
That is the question.

11. Monopsony 1. Single buyer / employer 2. Firm is a “wage maker”
MRC curve
is above the
S curve
because
a higher
wage is
needed to
attract new
workers &
for current
workers.
Possible
wage rate
could be
between
c and b.
In a Monopolistic Market:
-- Employer’s marginal
resource (labor) cost curve (MRC) lies above the labor supply curve S.
-- MRP=MRC at point b.
-- Monopolist hires Qb
workers (compared with Qc under competition).
-- Shown by point c on S, it pays only wage rate Wb (compared with the
competitive wage Wc).
MRC b a ● c

12. Monopsony Model Monopsony Upward-Sloping Labor Supply to Firm
MRC Higher Than the Wage Rate
Equilibrium Wage and Employment
Graphically…

13. Monopsony Model Monopsonistic Labor Market Examples of Monopsony Power
MRC S b
Wage Rate (Dollars) a Wc Wm c
MRP Qm Qc
Quantity of Labor
Examples of Monopsony Power

14. Three Union Models 1) Demand Enhancement Model Increase Product Demand
Increase Productivity
Alter the Price of Other Inputs S
Increase
In Demand Wu
Wage Rate (Dollars) Wc D2 D1 Qc Qu
Quantity of Labor

15. Three Union Models 2) Exclusive or Craft Union Model
Restricted Immigration
Reduced Child Labor
Encouraged Compulsory Retirement
Shorter Hour Workweek
Exclusive Unionism
Occupational Licensing
Graphically…

16. Three Union Models Exclusive or Craft Union Model Quantity of Labor S2
Wage Rate (Dollars) Wu
Decrease
In Supply Wc D Qu Qc
Quantity of Labor

17. Three Union Models 3) Inclusive or Industrial Union Model
Inclusive Unionism S
Wage Rate (Dollars) a b Wu e Wc D Qu Qc Qe
Quantity of Labor

18. Overview of 4 Market Models

19. Minimum Wage
Minimum wage legislation is less likely to have an adverse effect in monopsonistic markets.
Critics of min. wage laws argue that it reduces employment.
If min. wage is set too high, some labor markets can expect a surplus of labor.
Increases in the Federal min. wage during the 1990s saw smaller decreases in teenage employment than in previous min. wage hikes.
Unions support a higher min. wage because it makes less-skilled workers less substitutable for union workers.
Some supporters of the min. wage say it has a positive employment effect due to reduced turnover rates, higher efficiency, and therefore increased productivity.

20. Wage Differentials Education Levels and Individual Annual Earnings
Educational
Attainment
Professional Degree
Annual Earnings (Thousands of Dollars)
Bachelor’s Degree
Associate’s Degree
High School Diploma
Age

21. Average Annual Wages in Selected Occupations, 2005
Wage Differentials
Average Annual Wages in Selected Occupations, 2005
Occupation
Annual Average Wages
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
$177,690
135,040
97,350
96,620
95,570
79,230
60,620
56,880
47,270
45,630
37,750
24,700
23,170
22,420
21,100
15,500
Wage differentials
can arise from
both the demand
-side & supply-side
of labor markets.
Source: Bureau of Labor Statistics, 2006

22. Annual work hours
(2004)