1. Copyright 2008 The McGraw-Hill Companies 26-1 Labor Wages and Earnings Real Wages and Productivity Purely Competitive Labor Market Monopsony Model Three Union Models Bilateral Monopoly Minimum Wage Wage Differentials Pay for Performance Last Word Key Terms End Show 26 Wage Determination

2. Copyright 2008 The McGraw-Hill Companies 26-2 Labor Wages and Earnings Real Wages and Productivity Purely Competitive Labor Market Monopsony Model Three Union Models Bilateral Monopoly Minimum Wage Wage Differentials Pay for Performance Last Word Key Terms End Show Chapter Objectives Why Labor Productivity and Real Hourly Compensation Track So Closely Over Time How Wage Rates and Employment Levels are Determined in Competitive Labor Markets How Monopsony Can Reduce Wages Below Competitive Levels How Unions Can Increase Wage Rates The Major Causes of Wage Differentials The Types, Benefits, and Costs of “Pay-for-Performance” Plans

3. Copyright 2008 The McGraw-Hill Companies 26-3 Labor Wages and Earnings Real Wages and Productivity Purely Competitive Labor Market Monopsony Model Three Union Models Bilateral Monopoly Minimum Wage Wage Differentials Pay for Performance Last Word Key Terms End Show Labor Wages and Earnings Wage Rate Nominal Wage Real Wage General Level of Wages Role of Productivity –Plentiful Capital –Access to Abundant Natural Resources –Advanced Technology –Labor Quality –Other Factors

4. Copyright 2008 The McGraw-Hill Companies 26-4 Labor Wages and Earnings Real Wages and Productivity Purely Competitive Labor Market Monopsony Model Three Union Models Bilateral Monopoly Minimum Wage Wage Differentials Pay for Performance Last Word Key Terms End Show Labor Wages and Earnings GLOBAL PERSPECTIVE Hourly Wages of Production Workers Selected Nations Hourly Pay in U.S. Dollars, 2004 Source: U.S. Bureau of Labor Statistics, 2006 Denmark Germany Switzerland Sweden United Kingdom France United States Australia Japan Canada Italy Korea Taiwan Mexico 0 5 10 15 20 25 30 35 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

5. Copyright 2008 The McGraw-Hill Companies 26-5 Labor Wages and Earnings Real Wages and Productivity Purely Competitive Labor Market Monopsony Model Three Union Models Bilateral Monopoly Minimum Wage Wage Differentials Pay for Performance Last Word Key Terms End Show Real Wages and Productivity Secular Growth of Real Wages Long Run Trend of Real Wages in the U.S. Real Wage Rate (Dollars) Quantity of Labor D 1900 S 1900 D 1950 D 2000 D 2020 S 1950 S 2000 S 2020

6. Copyright 2008 The McGraw-Hill Companies 26-6 Labor Wages and Earnings Real Wages and Productivity Purely Competitive Labor Market Monopsony Model Three Union Models Bilateral Monopoly Minimum Wage Wage Differentials Pay for Performance Last Word Key Terms End Show Purely Competitive Labor Market Market Demand for Labor Market Supply for Labor Labor Market Equilibrium MRP = MRC Rule Graphically…

7. Copyright 2008 The McGraw-Hill Companies 26-7 Labor Wages and Earnings Real Wages and Productivity Purely Competitive Labor Market Monopsony Model Three Union Models Bilateral Monopoly Minimum Wage Wage Differentials Pay for Performance Last Word Key Terms End Show Purely Competitive Labor Market Wage Rate (Dollars) ($10) W C ($10) W C Labor MarketIndividual Firm Quantity of Labor QCQC (1000) 00 D=MRP (∑ mrps) d=mrp qCqC (5) s=MRC S e c b a G 26.1

8. Copyright 2008 The McGraw-Hill Companies 26-8 Labor Wages and Earnings Real Wages and Productivity Purely Competitive Labor Market Monopsony Model Three Union Models Bilateral Monopoly Minimum Wage Wage Differentials Pay for Performance Last Word Key Terms End Show Monopsony Model Monopsony Upward-Sloping Labor Supply to Firm MRC Higher Than the Wage Rate Equilibrium Wage and Employment Graphically… O 26.1 G 26.2

9. Copyright 2008 The McGraw-Hill Companies 26-9 Labor Wages and Earnings Real Wages and Productivity Purely Competitive Labor Market Monopsony Model Three Union Models Bilateral Monopoly Minimum Wage Wage Differentials Pay for Performance Last Word Key Terms End Show Monopsony Model Wage Rate (Dollars) Quantity of Labor 0 S MRP MRC c b a WcWc WmWm QmQm QcQc Examples of Monopsony Power Monopsonistic Labor Market W 26.1

10. Copyright 2008 The McGraw-Hill Companies 26-10 Labor Wages and Earnings Real Wages and Productivity Purely Competitive Labor Market Monopsony Model Three Union Models Bilateral Monopoly Minimum Wage Wage Differentials Pay for Performance Last Word Key Terms End Show Three Union Models Demand Enhancement Model –Increase Product Demand –Increase Productivity –Alter the Price of Other Inputs Wage Rate (Dollars) Quantity of Labor WuWu QcQc QuQu WcWc D1D1 D2D2 S Increase In Demand

11. Copyright 2008 The McGraw-Hill Companies 26-11 Labor Wages and Earnings Real Wages and Productivity Purely Competitive Labor Market Monopsony Model Three Union Models Bilateral Monopoly Minimum Wage Wage Differentials Pay for Performance Last Word Key Terms End Show Three Union Models Exclusive or Craft Union Model –Restricted Immigration –Reduced Child Labor –Encouraged Compulsory Retirement –Shorter Hour Workweek –Exclusive Unionism –Occupational Licensing Graphically…

12. Copyright 2008 The McGraw-Hill Companies 26-12 Labor Wages and Earnings Real Wages and Productivity Purely Competitive Labor Market Monopsony Model Three Union Models Bilateral Monopoly Minimum Wage Wage Differentials Pay for Performance Last Word Key Terms End Show Three Union Models Exclusive or Craft Union Model Wage Rate (Dollars) Quantity of Labor D S1S1 QcQc WcWc S2S2 WuWu QuQu Decrease In Supply

13. Copyright 2008 The McGraw-Hill Companies 26-13 Labor Wages and Earnings Real Wages and Productivity Purely Competitive Labor Market Monopsony Model Three Union Models Bilateral Monopoly Minimum Wage Wage Differentials Pay for Performance Last Word Key Terms End Show Three Union Models Inclusive or Industrial Union Model –Inclusive Unionism Wage Rate (Dollars) Quantity of Labor D S QcQc WcWc WuWu QuQu QeQe a b e

14. Copyright 2008 The McGraw-Hill Companies 26-14 Labor Wages and Earnings Real Wages and Productivity Purely Competitive Labor Market Monopsony Model Three Union Models Bilateral Monopoly Minimum Wage Wage Differentials Pay for Performance Last Word Key Terms End Show Three Union Models Wage Increases and Unemployment Average 15% Higher Wages Reduced Employment Levels Corrected by: –Growth –Elasticity

15. Copyright 2008 The McGraw-Hill Companies 26-15 Labor Wages and Earnings Real Wages and Productivity Purely Competitive Labor Market Monopsony Model Three Union Models Bilateral Monopoly Minimum Wage Wage Differentials Pay for Performance Last Word Key Terms End Show Bilateral Monopoly Indeterminate Outcome Desirability of Bilateral Monopoly Wage Rate (Dollars) Quantity of Labor D=MRP S QcQc WcWc WuWu Q u =Q m MRC WmWm a

16. Copyright 2008 The McGraw-Hill Companies 26-16 Labor Wages and Earnings Real Wages and Productivity Purely Competitive Labor Market Monopsony Model Three Union Models Bilateral Monopoly Minimum Wage Wage Differentials Pay for Performance Last Word Key Terms End Show Minimum Wage Case Against the Minimum Wage Case For the Minimum Wage State and Locally Set Rates Evidence and Conclusions

17. Copyright 2008 The McGraw-Hill Companies 26-17 Labor Wages and Earnings Real Wages and Productivity Purely Competitive Labor Market Monopsony Model Three Union Models Bilateral Monopoly Minimum Wage Wage Differentials Pay for Performance Last Word Key Terms End Show Wage Differentials Average Annual Wages in Selected Occupations, 2005 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 Source: Bureau of Labor Statistics, 2006 Occupation Annual Average Wages

18. Copyright 2008 The McGraw-Hill Companies 26-18 Labor Wages and Earnings Real Wages and Productivity Purely Competitive Labor Market Monopsony Model Three Union Models Bilateral Monopoly Minimum Wage Wage Differentials Pay for Performance Last Word Key Terms End Show Wage Differentials Marginal Revenue Productivity Noncompeting Groups –Ability –Education and Training Human Capital Compensating Differences O 26.2

19. Copyright 2008 The McGraw-Hill Companies 26-19 Labor Wages and Earnings Real Wages and Productivity Purely Competitive Labor Market Monopsony Model Three Union Models Bilateral Monopoly Minimum Wage Wage Differentials Pay for Performance Last Word Key Terms End Show Wage Differentials Education Levels and Individual Annual Earnings Educational Attainment Annual Earnings (Thousands of Dollars) Age Professional Degree Bachelor’s Degree Associate’s Degree High School Diploma

20. Copyright 2008 The McGraw-Hill Companies 26-20 Labor Wages and Earnings Real Wages and Productivity Purely Competitive Labor Market Monopsony Model Three Union Models Bilateral Monopoly Minimum Wage Wage Differentials Pay for Performance Last Word Key Terms End Show Wage Differentials Marginal Revenue Market Imperfections –Lack of Job Information –Geographic Immobility –Unions and Government Restraints –Discrimination

21. Copyright 2008 The McGraw-Hill Companies 26-21 Labor Wages and Earnings Real Wages and Productivity Purely Competitive Labor Market Monopsony Model Three Union Models Bilateral Monopoly Minimum Wage Wage Differentials Pay for Performance Last Word Key Terms End Show Pay for Performance The Principal-Agent Problem Revisited Incentive Pay Plan Piece Rates Commissions or Royalties Bonuses, Stock Options, and Profit Sharing Efficiency Wages Negative Side-Effects of Pay for Performance O 26.3O 26.4

22. Copyright 2008 The McGraw-Hill Companies 26-22 Labor Wages and Earnings Real Wages and Productivity Purely Competitive Labor Market Monopsony Model Three Union Models Bilateral Monopoly Minimum Wage Wage Differentials Pay for Performance Last Word Key Terms End Show Are Chief Executive Officers (CEOs) Overpaid? Current U.S. CEO Salaries are High Relative to Domestic or Foreign Firms Several Possible Reasons Marginal Productivity Impact by Good Decisions Top Salaries Like “Prize” Goals for all to Have as a Goal Impacting Many Jobs High Salary Bias by Board Members Due to their Own Previous Performances Some Argue High Salaries are Unjustified and are Unfair to Stockholders Last Word

23. Copyright 2008 The McGraw-Hill Companies 26-23 Labor Wages and Earnings Real Wages and Productivity Purely Competitive Labor Market Monopsony Model Three Union Models Bilateral Monopoly Minimum Wage Wage Differentials Pay for Performance Last Word Key Terms End Show Key Terms wage rate nominal wage real wage purely competitive labor marketpurely competitive labor market monopsony exclusive unionism occupational licensingoccupational licensing inclusive unionism bilateral monopoly minimum wage wage differentials marginal revenue productivitymarginal revenue productivity noncompeting groupsnoncompeting groups human capital compensating differencescompensating differences incentive pay plan

24. Copyright 2008 The McGraw-Hill Companies 26-24 Labor Wages and Earnings Real Wages and Productivity Purely Competitive Labor Market Monopsony Model Three Union Models Bilateral Monopoly Minimum Wage Wage Differentials Pay for Performance Last Word Key Terms End Show Next Chapter Preview… Rent, Interest, and Profit