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McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
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
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
Real Wages and Productivity
• Long-run trend of average real wages in the U.S.
Rea
l Wag
e R
ate
(Do
llars
)
Quantity of Labor
D1900
S1900
D1950
D2000D2020
S1950
S2000
S2020
LO1
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
($10)WC
($10)WC
Wag
e R
ate
(Do
llar
s)
Labor Market
Quantity of Labor
Wag
e R
ate
(Do
llar
s)
Individual Firm
Quantity of Labor
QC
(1000)
0 0
d=mrp
qC
(5)
s=MRC
Competitive Labor Market
LO2
D=MRP(∑ mrp’s)
S
e b
a
c
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
• Examples of monopsony power
Monopsony Model
Wa
ge
Ra
te (
Do
llars
)
Quantity of Labor
0
S
MRP
MRC
c
b
aWc
Wm
Qm Qc
LO3
Monopsony Power
• Maximize profit by hiring smaller number of workers
• Examples of monopsony power
• Nurses
• Professional Athletes
• Teachers
• Three union models
LO3
Demand Enhancement Model
• Union model• Increase product demand• Alter price of other inputs
Wa
ge
Ra
te (
Do
llars
)
Quantity of Labor
Wu
Qc Qu
Wc
D1
D2
S
IncreaseIn Demand
LO4
Wa
ge
Ra
te (
Do
llars
)
Quantity of Labor
D
S1
Qc
Wc
S2
Wu
Qu
DecreaseIn Supply
Craft Union Model
LO4
Industrial Union Model
• Inclusive unionism• Auto and steel workers
Wa
ge
Ra
te (
Do
llars
)
Quantity of Labor
D
S
Qc
Wc
Wu
Qu Qe
a be
LO4
Bilateral Monopoly Model
• Monopsony and inclusive unionism
• Single buyer and seller
• Not uncommon
• Indeterminate outcome
• Desirability
LO4
Bilateral Monopoly Model
LO4
Wa
ge
Ra
te (
Do
llars
)
Quantity of Labor
D=MRP
S
Qc
Wc
Wu
Qu=Qm
MRC
Wm
a
The Minimum Wage Controversy
• Case against minimum wage
• Case for minimum wage
• State and locally set rates
• Evidence and conclusions
LO5
• Differences across occupations
• What explains wage differentials?
• Marginal revenue productivity
• Noncompeting groups
• Ability
• Education and training
• Compensating differences
LO5
Wage Differentials
Wage Differentials
• Workers prevented from moving to higher paying jobs
• Market imperfections
• Lack of job information
• Geographic immobility
• Unions and government restraints
• Discrimination
LO5