28CHAPTER          Wage  Determination
LABOR, WAGES, AND EARNINGSWages Defined...Wages - - Salary - - EarningsWage RateNominal WagesReal WagesInternational diffe...
GLOBAL PERSPECTIVE           Hourly Wages of Production Workers,           Selected Nations                        Hourly ...
GENERAL LEVEL OF WAGESRole of Productivity• Plentiful Capital• Access to Abundant  Natural Resources• Advanced  Technology...
REAL WAGES AND   PRODUCTIVITYGrowth in real income (earnings)Growth in output per worker-hour       Can only grow at     a...
PURELY COMPETITIVE   LABOR MARKETPurely competitive labor markeMany FirmsNumerous Qualified Worker“Wage Taker” Behavior
PURELY COMPETITIVE LABOR                 MARKET EQUILIBRIUM                                                 S             ...
PURELY COMPETITIVE LABOR                 MARKET EQUILIBRIUM                                              S                ...
MONOPSONY MODEL• Single Buyer of a type  of labor• The type of labor is  relatively immobile  “Wage Maker”  Behavior Upwar...
MONOPSONISTIC                      LABOR MARKET                                                 SWage Rate (dollars)      ...
MONOPSONISTIC                           LABOR MARKET                                        MRC                           ...
MONOPSONISTIC                           LABOR MARKET                                        MRC                           ...
MONOPSONISTIC                         LABOR MARKET                                         MRC                            ...
THREE UNION MODELS       Demand-Enhancement Model                                               SWage Rate (dollars)      ...
THREE UNION MODELS       Demand-Enhancement Model increasing                             ...by                            ...
THREE UNION MODELS       Demand-Enhancement Model increasing                             ...by                            ...
THREE UNION MODELS       Demand-Enhancement Model increasing                             ...by                            ...
THREE UNION MODELS       Exclusive or Craft Model                                               S1Wage Rate (dollars)     ...
THREE UNION MODELS       Exclusive or Craft Model                   ...restrictive                                        ...
THREE UNION MODELS       Exclusive or Craft Model                    ...restrictive                                       ...
THREE UNION MODELS       Exclusive or Craft Model                    ...restrictive                                       ...
THREE UNION MODELS       Inclusive or Industrial Model                                                ...by organizing    ...
THREE UNION MODELS       Inclusive or Industrial Model                                                ...by organizing    ...
WAGE INCREASES  AND UNEMPLOYMENT• Union members receive  about 15% higher wages• Negative impact on level  of employmentNe...
BILATERAL MONOPOLY MODEL                        Monopsonist & Union Seek                        Different Wage Rates...   ...
BILATERAL MONOPOLY MODEL                        Monopsonist & Union Seek                        Different Wage Rates...   ...
MINIMUM WAGE  CONTROVERSY•Case Against  Minimum Wage•Case For Minimum  Wage•Evidence and  Conclusions
WAGE DIFFERENTIALSMarginal Revenue ProductivityNoncompeting Groups  •Ability  •Education and   Training  •Investment in Hu...
WAGE DIFFERENTIALSCompensatingDifferences •Nonmonetary  DifferencesMarket Imperfections •Lack of Job Information •Geograph...
PAY FOR PERFORMANCEThe Principal-Agent  ProblemIncentive Pay Plan• Piece Rates• Commissions or  Royalties• Bonuses, Stock ...
PAY FOR PERFORMANCENegative Side-Effects of Pay for Performance •Poor Product Quality •Questionable or  Fraudulent Sales  ...
wage rate                                     bilateral monopolynominal wage                                  minimum wage...
Next:Rent, Interest, and Profit               Chapter 29
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AP Micro Wage Deteremination

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AP Micro Wage Deteremination

  1. 1. 28CHAPTER Wage Determination
  2. 2. LABOR, WAGES, AND EARNINGSWages Defined...Wages - - Salary - - EarningsWage RateNominal WagesReal WagesInternational differences...
  3. 3. GLOBAL PERSPECTIVE Hourly Wages of Production Workers, Selected Nations Hourly Pay in U.S. Dollars, 2001 0 5 10 15 20 25 Germany Denmark Switzerland United States Japan SwedenUnited Kingdom France Canada Italy Australia Korea Taiwan Mexico Source: U.S. Bureau of Labor Statistics, 2003
  4. 4. GENERAL LEVEL OF WAGESRole of Productivity• Plentiful Capital• Access to Abundant Natural Resources• Advanced Technology• Labor Quality
  5. 5. REAL WAGES AND PRODUCTIVITYGrowth in real income (earnings)Growth in output per worker-hour Can only grow at about the same rate!
  6. 6. PURELY COMPETITIVE LABOR MARKETPurely competitive labor markeMany FirmsNumerous Qualified Worker“Wage Taker” Behavior
  7. 7. PURELY COMPETITIVE LABOR MARKET EQUILIBRIUM S Includes Normal ProfitWage Rate (dollars) Non- Labor Costs S = MRC Wc $10 Wc ($10) Labor D = MRP Costs ( mrp’s) d = mrp (1000) (5) Quantity of Labor Quantity of Labor Labor Market Individual Firm
  8. 8. PURELY COMPETITIVE LABOR MARKET EQUILIBRIUM S Includes Normal Marginal Resource ProfitWage Rate (dollars) Cost (MRC) will be Non- Labor Wc constant and W Costs to $10 equal c S = MRC ($10) resource price (the wage rate) D = MRP Labor Costs ( mrp’s) d = mrp (1000) (5) Quantity of Labor Quantity of Labor Labor Market Individual Firm
  9. 9. 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
  10. 10. MONOPSONISTIC LABOR MARKET SWage Rate (dollars) In monopsony MRC lies above the supply curve. Quantity of Labor
  11. 11. MONOPSONISTIC LABOR MARKET MRC SWage Rate (dollars) MRP = MRC Wm MRP Qm units of labor hired Qm Quantity of Labor
  12. 12. MONOPSONISTIC LABOR MARKET MRC S The competitiveWage Rate (dollars) solution would result in a higher Wc wage and greater Wm employment. MRP Qm Qc Quantity of Labor
  13. 13. MONOPSONISTIC LABOR MARKET MRC S Monopsonists maximize The competitiveWage Rate (dollars) profits by hiring a smaller solution would number of workers anda higher result in Wc wage and greater thereby paying a less-than- Wm employment competitive wage rate. MRP Qm Qc Quantity of Labor
  14. 14. THREE UNION MODELS Demand-Enhancement Model SWage Rate (dollars) Wc D1 Qc Quantity of Labor
  15. 15. THREE UNION MODELS Demand-Enhancement Model increasing ...by product demand SWage Rate (dollars) Wu Wc D2 D1 Qc Qu Quantity of Labor
  16. 16. THREE UNION MODELS Demand-Enhancement Model increasing ...by product demand ...by increasing S productivityWage Rate (dollars) Wu Wc D2 D1 Qc Qu Quantity of Labor
  17. 17. THREE UNION MODELS Demand-Enhancement Model increasing ...by product demand ...by increasing S productivity ...by increasing the price of substitutesWage Rate (dollars) Wu Wc D2 D1 Qc Qu Quantity of Labor
  18. 18. THREE UNION MODELS Exclusive or Craft Model S1Wage Rate (dollars) Wc D Qc Quantity of Labor
  19. 19. THREE UNION MODELS Exclusive or Craft Model ...restrictive membership S2 policies S1Wage Rate (dollars) Wu Wc D Qu Qc Quantity of Labor
  20. 20. THREE UNION MODELS Exclusive or Craft Model ...restrictive membership S2 policies S1 ...restricting labor supply of the economy as a wholeWage Rate (dollars) Wu Wc D Qu Qc Quantity of Labor
  21. 21. THREE UNION MODELS Exclusive or Craft Model ...restrictive membership S2 policies S1 ...restricting labor supply of the economy as a wholeWage Rate (dollars) …occupational licensing Wu Wc D Qu Qc Quantity of Labor
  22. 22. THREE UNION MODELS Inclusive or Industrial Model ...by organizing virtually all S workers and thereby control of the supply curve for laborWage Rate (dollars) causing… Wc D Qc Quantity of Labor
  23. 23. THREE UNION MODELS Inclusive or Industrial Model ...by organizing virtually all S workers and thereby control of the supply curve for laborWage Rate (dollars) causing… Wu Wc D Qu Qc Qe Quantity of Labor
  24. 24. WAGE INCREASES AND UNEMPLOYMENT• Union members receive about 15% higher wages• Negative impact on level of employmentNegative unemploymenteffect reduced by: Growth Elasticity
  25. 25. BILATERAL MONOPOLY MODEL Monopsonist & Union Seek Different Wage Rates... MRC S …economi c theoryWage Rate (dollars) cannot Wu determine Wc the actual Wm outcome. D D=MRP Qu=Qm Qc Quantity of Labor
  26. 26. BILATERAL MONOPOLY MODEL Monopsonist & Union Seek Different Wage Rates... MRC S …economi c theoryWage Rate (dollars) cannot Wu determine Wc the actual Wm outcome. D D=MRP Desirability =Q Bilateral Monopoly Q of Q u m c Quantity of Labor
  27. 27. MINIMUM WAGE CONTROVERSY•Case Against Minimum Wage•Case For Minimum Wage•Evidence and Conclusions
  28. 28. WAGE DIFFERENTIALSMarginal Revenue ProductivityNoncompeting Groups •Ability •Education and Training •Investment in Human Capital
  29. 29. WAGE DIFFERENTIALSCompensatingDifferences •Nonmonetary DifferencesMarket Imperfections •Lack of Job Information •Geographical Immobility
  30. 30. PAY FOR PERFORMANCEThe Principal-Agent ProblemIncentive Pay Plan• Piece Rates• Commissions or Royalties• Bonuses, Stock Options,
  31. 31. PAY FOR PERFORMANCENegative 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
  32. 32. wage rate bilateral monopolynominal wage minimum wagereal wage wage differentialspurely competitive labor marginal revenue market productivitymonopsony noncompeting groupsexclusive unionism investment in human capitaloccupational licensing compensating differencesinclusive unionism incentive pay plan Copyright McGraw-Hill/Irwin, Inc. 2005 BACK END
  33. 33. Next:Rent, Interest, and Profit Chapter 29

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