Wage Determination

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

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-

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

Real Wages and Productivity
LO1
13-

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-

($10)
WC
($10)
WC
QC
(1000)
0
0
d=mrp
qC
(5)
s=MRC
Competitive Labor Market
LO2
D=MRP
(∑ mrp’s)
S
e
b
a
c
13-

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-

Examples of monopsony power
Monopsony Model
Wage Rate (Dollars)
Quantity of Labor
0
S
MRP
MRC
c
b
a
Wc
Wm
Qm
Qc
LO3
13-

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

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

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

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

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

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

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

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

Wage Differentials
LO5
13-

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-