Power point presentation on Chapter 17 of Microeconomics Book, by McConnel and Brue

1. Microeconomics
McConnell and Brue
Microeconomics
of Resources
Markets and
Government
Chapter 17
Wage
Determination
Prof. Dr. Musarrat Adnan

2. Learning Objectives
1. Show how wage rates and employment levels are
determined in competitive labor markets.
2. Demonstrate how monopsony (a market with a single
employer) can reduce wages below competitive
levels.
3. Discuss how unions increase wage rates by pursuing
the demand-enhancement model, the craft union
model, or the industrial union model.
4. Explain why wages and employment are determined
by collective bargaining in a situation of bilateral
monopoly.
5. Discuss how minimum wage laws affect labor
markets.

3. Labor, Wages, and Earnings
Labor supply and labor demand interact to
determine the level of hourly wage rates or
annual salaries in each occupation.
Labor Demand:
Marginal Revenue Product: Because resource demand is derived
from product demand, the strength of the demand for any
resource will depend on:
1. The productivity of the resource in helping to create a good or
service.
2. The market value or price of the good or service it helps
produce.

4. Labor Demand
The amount that each additional unit of a resource adds to the firm’s
total (resource) cost is called its marginal resource cost (MRC). In
equation form.

5. Labor, Wages, and Earnings
Economists use the term “labor” broadly to
apply to
1. Blue and white-collar workers of all varieties;
2. Professional people such as lawyers,
physicians, dentists, and teachers; and
3. owners of small businesses, including
barbers, plumbers, and a host of retailers
who provide labor as they operate their own
businesses.

6. Labor, Wages, and Earnings
Wages are the price that employers pay for
labor in the form of hourly pay, annual
salaries, bonuses, commissions, and
royalties, but also fringe benefits such as
paid vacations, health insurance, and
pensions
Wage rate is the price paid per unit of labor
services, in this case an hour of work.

7. Labor, Wages, and Earnings
A nominal wage is the amount of money
received per hour, day, or year.
A real wage is the quantity of goods and
services a worker can obtain with nominal
wages; real wages reveal the “purchasing
power” of nominal wages.
Wages differ among nations, regions,
occupations, and individuals.

8. Labor, Wages, and Earnings
Role of Productivity
The demand for labor, or for any other
resource, depends on its productivity. The
greater the productivity of labor, the greater is
the demand for it. And if the total supply of labor
is fixed, then the stronger the demand for
labor, the higher is the average level of real
wages.

9. Labor, Wages, and Earnings
There are several reasons for that high
productivity.
1. Plentiful capital
2. Access to abundant natural resources
3. Advanced technology
4. Labor quality (health, education, training,
etc,.)
5. Other factors (efficient management,
social and political environment, large
domestic market, specialization)

10. Wage rate in a Purely Competitive
Labor Market
Let’s begin by examining labor demand and
labor supply in a purely competitive labor
market.
1. Numerous firms compete with one another
in hiring specific type of labor.
2. Each of many qualified workers with
identical skills supplies that type of labor.
3. Individual firms and individual workers are
“wage takers” since neither can exert any
control over the market wage rate.

11. Wage rate in a Purely Competitive
Labor Market
Market Supply of Labor
The supply curve for each type of labor slopes
upward, indicating that employers as a group
must pay higher wage rates to obtain more
workers.
Firms that want to hire these workers (here,
carpenters) must pay higher wage rates to
attract them away from the alternative job
opportunities available to them. They must
also pay higher wages to induce people who
are not currently in the labor force.

12. Wage rate in a Purely Competitive
Labor Market
Labor Market Equilibrium.
The intersection of the market labor demand curve and
the market labor supply curve determines the
equilibrium wage rate and level of employment in a
pure competitive labor market.

13. Wage rate in Monopsony
Labor Market
Monopsony, a market structure in which there is
only a single buyer.
A labor market monopsony has the following
characteristics:
1. There is only a single buyer of a particular type of labor.
2. The workers providing this type of labor have few employment
options other than working for the monopsony because they
are either geographically immobile or because finding
alternative employment would mean having to acquire new
skills.
3. The firm is a “wage maker” because the wage rate it must pay
varies directly with the number of workers it employs.

14. Wage rate in Monopsony
Labor Market
MRC Higher Than the Wage Rate
Monopsonist will pay a higher wage to attract
an additional worker, it must pay that higher
wage not only to the additional worker, but to
all the workers it is currently employing at a
lower wage. If not, labor morale will
deteriorate, and labor unrest will prevail
because of wage rate differences existing for
the same job.

15. Wage rate in Monopsony
Labor Market

16. Wage rate in Monopsony
Labor Market
Since the monopsonist is the only employer in the labor
market, its marginal resource (labor) cost exceeds
the wage rate. Graphically, the monopsonist’s MRC
curve lies above the average-cost-of-labor curve, or
labor supply curve S.

17. Wage rate in Monopsony
Labor Market
Equilibrium Wage and Employment
To maximize profit, the monopsonist will employ the
quantity of labor Qm in Figure 17.4, because at
that quantity MRC and MRP are equal (point b).
Monopsonist next determines how much it must
pay to attract these Qm workers. From the supply
curve S, specifically point c, it sees that it must
pay wage rate Wm. Clearly, it need not pay a
wage equal to MRP; it can attract and hire exactly
the number of workers it wants (Qm) with wage
rate Wm. And that is the wage that it will pay.

18. Wage rate in Monopsony
Labor Market
Examples of Monopsony Power
Markets for nurses, professional athletes, public
school teachers, newspaper employees.
In case of nurses, It has been found, that, other
things equal, the smaller the number of
hospitals in a town or city (that is, the greater
the degree of monopsony), the lower the
beginning salaries of nurses.

19. The Minimum-Wage Controversy
Discuss how minimum wage laws affect labor
markets
The purpose of the minimum wage is to provide a
“wage floor” that will help lessskilled workers earn
enough income to escape poverty.
Case against the Minimum Wage.
An above-equilibrium minimum wage (say, Wu ) will simply cause
employers to hire fewer workers. Downward sloping labor
demand curves are a reality. The higher labor costs may even
force some firms out of business. Then some of the poor, low-
wage workers whom the minimum wage was designed to help
will find themselves out of work.

20. The Minimum-Wage Controversy
Case for the Minimum Wage
The higher wage rate might prompt firms to find more
productive tasks for low-paid workers, thereby raising
their productivity.
Alternatively, the minimum wage may reduce labor
turnover (the rate at which workers voluntarily quit).
With fewer low productive trainees, the average
productivity of the firm’s workers would rise.

21. The Minimum-Wage Controversy
The overall effect of the minimum wage is thus
uncertain. On the one hand, the employment and
unemployment effects of the minimum wage do not
appear to be as great as many critics fear. On the
other hand, because a large part of its effect is
dissipated on non-poverty families, the minimum
wage is not as strong an antipoverty tool as many
supporters contend.

22. The Minimum-Wage Controversy
This stems from two realities: (1) More workers
are believed to be helped than hurt by the
minimum wage, and (2) the minimum wage
gives society some assurance that employers
are not “taking undue advantage” of
vulnerable, low-skilled workers
The minimum wage has strong political
support.

23. Quick Questions
1. Demonstrate how monopsony (a market
with a single employer) can reduce wages
below competitive levels
2. Discuss how minimum wage laws affect
labor markets.
3. What is minimum wage controversy and
how minimum wages can help or hurt
wage earners.