34
28 - 1 Copyright McGraw-Hill/Irwin, 2002 Labor, Wages, an d Earnings General Level of Wages Real Wages and P roductivity Purely Competiti ve Labor Market Monopsony Model Three Union Mode ls Bilateral Monopo ly Model Minimum Wage Con troversy Wage Differentia ls Pay For Performa nce Key Terms Previo us Slide Next Slid e End Show Wage Determination HELP WANTED 28 C H A P T E R

Wage determination

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Page 1: Wage determination

28 - 1Copyright McGraw-Hill/Irwin, 2002

Labor, Wages, and Earnings

General Level of Wages

Real Wages and Productivity

Purely Competitive Labor Market

Monopsony Model

Three Union Models

Bilateral Monopoly Model

Minimum Wage Controversy

Wage Differentials

Pay For Performance

Key Terms

PreviousSlide

NextSlide

EndShow

Wage Determination

HELP

WANTED

28C H A P T E R

Page 2: Wage determination

28 - 2Copyright McGraw-Hill/Irwin, 2002

Labor, Wages, and Earnings

General Level of Wages

Real Wages and Productivity

Purely Competitive Labor Market

Monopsony Model

Three Union Models

Bilateral Monopoly Model

Minimum Wage Controversy

Wage Differentials

Pay For Performance

Key Terms

PreviousSlide

NextSlide

EndShow

Wages Defined...Wages - - Salary - - Earnings

Nominal Wages

Real Wages

International differences...

LABOR, WAGES, AND EARNINGS

Page 3: Wage determination

28 - 3Copyright McGraw-Hill/Irwin, 2002

Labor, Wages, and Earnings

General Level of Wages

Real Wages and Productivity

Purely Competitive Labor Market

Monopsony Model

Three Union Models

Bilateral Monopoly Model

Minimum Wage Controversy

Wage Differentials

Pay For Performance

Key Terms

PreviousSlide

NextSlide

EndShow

0 4 8 12 16 20 24 28 32Germany

SwitzerlandDenmarkSweden

JapanUnited States

FranceItaly

United KingdomAustralia

CanadaKorea

TaiwanPortugal

GLOBAL PERSPECTIVEHourly Wages of Production Workers,Selected Nations

Source: U.S. Bureau of Labor Statistics

Hourly Pay in U.S. Dollars, 1999

Page 4: Wage determination

28 - 4Copyright McGraw-Hill/Irwin, 2002

Labor, Wages, and Earnings

General Level of Wages

Real Wages and Productivity

Purely Competitive Labor Market

Monopsony Model

Three Union Models

Bilateral Monopoly Model

Minimum Wage Controversy

Wage Differentials

Pay For Performance

Key Terms

PreviousSlide

NextSlide

EndShow

GENERAL LEVEL OF WAGES

Role of Productivity• Plentiful Capital• Abundant Natural Resources

• Advanced Technology• Labor Quality• Intangible Factors

Page 5: Wage determination

28 - 5Copyright McGraw-Hill/Irwin, 2002

Labor, Wages, and Earnings

General Level of Wages

Real Wages and Productivity

Purely Competitive Labor Market

Monopsony Model

Three Union Models

Bilateral Monopoly Model

Minimum Wage Controversy

Wage Differentials

Pay For Performance

Key Terms

PreviousSlide

NextSlide

EndShow

REAL WAGES ANDPRODUCTIVITY

Growth in real income (earnings)

Growth in output per worker-hour

Can only grow at

about the same rate!

Secular Growth of Real Wages

Page 6: Wage determination

28 - 6Copyright McGraw-Hill/Irwin, 2002

Labor, Wages, and Earnings

General Level of Wages

Real Wages and Productivity

Purely Competitive Labor Market

Monopsony Model

Three Union Models

Bilateral Monopoly Model

Minimum Wage Controversy

Wage Differentials

Pay For Performance

Key Terms

PreviousSlide

NextSlide

EndShow

PURELY COMPETITIVELABOR MARKET

Purely competitive labor market:

Many Firms

Numerous Qualified Workers

“Wage Taker” Behavior

Market Demand for Labor

Market Supply of Labor

Page 7: Wage determination

28 - 7Copyright McGraw-Hill/Irwin, 2002

Labor, Wages, and Earnings

General Level of Wages

Real Wages and Productivity

Purely Competitive Labor Market

Monopsony Model

Three Union Models

Bilateral Monopoly Model

Minimum Wage Controversy

Wage Differentials

Pay For Performance

Key Terms

PreviousSlide

NextSlide

EndShow

Non-LaborCosts

LaborCosts

LABOR SUPPLY AND DEMANDPURELY COMPETITIVE MARKET

Labor Market

S

D = MRP( mrp’s)

Wc

(1000)

Individual Firm

S = MRC

d = mrp

Wc

Quantity of Labor

Wa

ge

Ra

te (

do

llars

)

Quantity of Labor

($10)

(5)

$10 $10 $10 $10 $10 $10

IncludesNormalProfit

Page 8: Wage determination

28 - 8Copyright McGraw-Hill/Irwin, 2002

Labor, Wages, and Earnings

General Level of Wages

Real Wages and Productivity

Purely Competitive Labor Market

Monopsony Model

Three Union Models

Bilateral Monopoly Model

Minimum Wage Controversy

Wage Differentials

Pay For Performance

Key Terms

PreviousSlide

NextSlide

EndShow

Non-LaborCosts

LaborCosts

IncludesNormalProfit

LABOR SUPPLY AND DEMANDPURELY COMPETITIVE MARKET

Labor Market

S

D = MRP( mrp’s)

Wc

(1000)

Individual Firm

S = MRC

d = mrp

Wc

Quantity of Labor

Wa

ge

Ra

te (

do

llars

)

Quantity of Labor

($10)

(5)

$10 $10 $10 $10 $10 $10

Marginal ResourceCost (MRC) will be

constant and equal toresource price(the wage rate)

Page 9: Wage determination

28 - 9Copyright McGraw-Hill/Irwin, 2002

Labor, Wages, and Earnings

General Level of Wages

Real Wages and Productivity

Purely Competitive Labor Market

Monopsony Model

Three Union Models

Bilateral Monopoly Model

Minimum Wage Controversy

Wage Differentials

Pay For Performance

Key Terms

PreviousSlide

NextSlide

EndShow

MONOPSONY MODEL

•Single Buyer of a type of labor

•The type of labor is relatively immobile “Wage Maker” Behavior

Upward-Sloping SupplyCurve to Firm

Page 10: Wage determination

28 - 10Copyright McGraw-Hill/Irwin, 2002

Labor, Wages, and Earnings

General Level of Wages

Real Wages and Productivity

Purely Competitive Labor Market

Monopsony Model

Three Union Models

Bilateral Monopoly Model

Minimum Wage Controversy

Wage Differentials

Pay For Performance

Key Terms

PreviousSlide

NextSlide

EndShow

Wa

ge

Ra

te (

do

llars

)S

Quantity of Labor

MONOPSONISTICLABOR MARKET

In monopsonyMRC lies abovethe supply curve

Page 11: Wage determination

28 - 11Copyright McGraw-Hill/Irwin, 2002

Labor, Wages, and Earnings

General Level of Wages

Real Wages and Productivity

Purely Competitive Labor Market

Monopsony Model

Three Union Models

Bilateral Monopoly Model

Minimum Wage Controversy

Wage Differentials

Pay For Performance

Key Terms

PreviousSlide

NextSlide

EndShow

Wa

ge

Ra

te (

do

llars

)

MRP

S

Wm

Quantity of Labor

MRC

Qm

MONOPSONISTICLABOR MARKET

MRP = MRC

Qm units oflabor hired

Page 12: Wage determination

28 - 12Copyright McGraw-Hill/Irwin, 2002

Labor, Wages, and Earnings

General Level of Wages

Real Wages and Productivity

Purely Competitive Labor Market

Monopsony Model

Three Union Models

Bilateral Monopoly Model

Minimum Wage Controversy

Wage Differentials

Pay For Performance

Key Terms

PreviousSlide

NextSlide

EndShow

Wa

ge

Ra

te (

do

llars

)

MRP

S

Wm

Quantity of Labor

MRC

Wc

Qm Qc

The competitivesolution would

result in a higherwage and greater

employment

MONOPSONISTICLABOR MARKET

Page 13: Wage determination

28 - 13Copyright McGraw-Hill/Irwin, 2002

Labor, Wages, and Earnings

General Level of Wages

Real Wages and Productivity

Purely Competitive Labor Market

Monopsony Model

Three Union Models

Bilateral Monopoly Model

Minimum Wage Controversy

Wage Differentials

Pay For Performance

Key Terms

PreviousSlide

NextSlide

EndShow

Wa

ge

Ra

te (

do

llars

)

MRP

S

Wm

Quantity of Labor

MRC

Wc

Qm Qc

The competitivesolution would

result in a higherwage and greater

employment

MONOPSONISTICLABOR MARKET

Monopsonists maximizeprofits by hiring a smaller

number of workers andthereby paying a less-than-

competitive wage rate.

Page 14: Wage determination

28 - 14Copyright McGraw-Hill/Irwin, 2002

Labor, Wages, and Earnings

General Level of Wages

Real Wages and Productivity

Purely Competitive Labor Market

Monopsony Model

Three Union Models

Bilateral Monopoly Model

Minimum Wage Controversy

Wage Differentials

Pay For Performance

Key Terms

PreviousSlide

NextSlide

EndShow

Wag

e R

ate

(do

llar

s)

D1

S

Quantity of Labor

Wc

Qc

THREE UNION MODELSDemand-Enhancement Model

Page 15: Wage determination

28 - 15Copyright McGraw-Hill/Irwin, 2002

Labor, Wages, and Earnings

General Level of Wages

Real Wages and Productivity

Purely Competitive Labor Market

Monopsony Model

Three Union Models

Bilateral Monopoly Model

Minimum Wage Controversy

Wage Differentials

Pay For Performance

Key Terms

PreviousSlide

NextSlide

EndShow

Wu

Qu

Wag

e R

ate

(do

llar

s)

D1

S

Quantity of Labor

Wc

Qc

D2

...by increasingproduct demand

THREE UNION MODELSDemand-Enhancement Model

Page 16: Wage determination

28 - 16Copyright McGraw-Hill/Irwin, 2002

Labor, Wages, and Earnings

General Level of Wages

Real Wages and Productivity

Purely Competitive Labor Market

Monopsony Model

Three Union Models

Bilateral Monopoly Model

Minimum Wage Controversy

Wage Differentials

Pay For Performance

Key Terms

PreviousSlide

NextSlide

EndShow

Wu

Qu

Wag

e R

ate

(do

llar

s)

D1

S

Quantity of Labor

Wc

Qc

D2

...by increasingproduct demand...by increasingproductivity

THREE UNION MODELSDemand-Enhancement Model

Page 17: Wage determination

28 - 17Copyright McGraw-Hill/Irwin, 2002

Labor, Wages, and Earnings

General Level of Wages

Real Wages and Productivity

Purely Competitive Labor Market

Monopsony Model

Three Union Models

Bilateral Monopoly Model

Minimum Wage Controversy

Wage Differentials

Pay For Performance

Key Terms

PreviousSlide

NextSlide

EndShow

Wu

Qu

Wag

e R

ate

(do

llar

s)

D1

S

Quantity of Labor

Wc

Qc

D2

...by increasingproduct demand...by increasingproductivity...by increasingthe price ofsubstitutes

THREE UNION MODELSDemand-Enhancement Model

Page 18: Wage determination

28 - 18Copyright McGraw-Hill/Irwin, 2002

Labor, Wages, and Earnings

General Level of Wages

Real Wages and Productivity

Purely Competitive Labor Market

Monopsony Model

Three Union Models

Bilateral Monopoly Model

Minimum Wage Controversy

Wage Differentials

Pay For Performance

Key Terms

PreviousSlide

NextSlide

EndShow

Wag

e R

ate

(do

llar

s)

D

Quantity of Labor

Wc

Qc

THREE UNION MODELSExclusive or Craft Model

S1

Page 19: Wage determination

28 - 19Copyright McGraw-Hill/Irwin, 2002

Labor, Wages, and Earnings

General Level of Wages

Real Wages and Productivity

Purely Competitive Labor Market

Monopsony Model

Three Union Models

Bilateral Monopoly Model

Minimum Wage Controversy

Wage Differentials

Pay For Performance

Key Terms

PreviousSlide

NextSlide

EndShow

Wu

Wag

e R

ate

(do

llar

s)

D

Quantity of Labor

Wc

Qc

THREE UNION MODELSExclusive or Craft Model

Qu

S1

...restrictive membership policies

S2

Page 20: Wage determination

28 - 20Copyright McGraw-Hill/Irwin, 2002

Labor, Wages, and Earnings

General Level of Wages

Real Wages and Productivity

Purely Competitive Labor Market

Monopsony Model

Three Union Models

Bilateral Monopoly Model

Minimum Wage Controversy

Wage Differentials

Pay For Performance

Key Terms

PreviousSlide

NextSlide

EndShow

Wu

Wag

e R

ate

(do

llar

s)

D

Quantity of Labor

Wc

Qc

THREE UNION MODELSExclusive or Craft Model

Qu

S1

...restrictive membership policies...restricting labor supply of the economy as a whole

S2

Page 21: Wage determination

28 - 21Copyright McGraw-Hill/Irwin, 2002

Labor, Wages, and Earnings

General Level of Wages

Real Wages and Productivity

Purely Competitive Labor Market

Monopsony Model

Three Union Models

Bilateral Monopoly Model

Minimum Wage Controversy

Wage Differentials

Pay For Performance

Key Terms

PreviousSlide

NextSlide

EndShow

Wu

Wag

e R

ate

(do

llar

s)

D

Quantity of Labor

Wc

Qc

THREE UNION MODELSExclusive or Craft Model

Qu

S1

...restrictive membership policies...restricting labor supply of the economy as a whole…occupational licensing

S2

Page 22: Wage determination

28 - 22Copyright McGraw-Hill/Irwin, 2002

Labor, Wages, and Earnings

General Level of Wages

Real Wages and Productivity

Purely Competitive Labor Market

Monopsony Model

Three Union Models

Bilateral Monopoly Model

Minimum Wage Controversy

Wage Differentials

Pay For Performance

Key Terms

PreviousSlide

NextSlide

EndShow

Wag

e R

ate

(do

llar

s)

Quantity of Labor

Wc

Qc

THREE UNION MODELSInclusive or Industrial Model

D

S

...by organizing virtually all workers and thereby control of the supply curve for labor causing…

Page 23: Wage determination

28 - 23Copyright McGraw-Hill/Irwin, 2002

Labor, Wages, and Earnings

General Level of Wages

Real Wages and Productivity

Purely Competitive Labor Market

Monopsony Model

Three Union Models

Bilateral Monopoly Model

Minimum Wage Controversy

Wage Differentials

Pay For Performance

Key Terms

PreviousSlide

NextSlide

EndShow

Wu

Wag

e R

ate

(do

llar

s)

D

Quantity of Labor

Wc

Qc

THREE UNION MODELSInclusive or Industrial Model

Qu

D

...by organizing virtually all workers and thereby control of the supply curve for labor causing…

S

Page 24: Wage determination

28 - 24Copyright McGraw-Hill/Irwin, 2002

Labor, Wages, and Earnings

General Level of Wages

Real Wages and Productivity

Purely Competitive Labor Market

Monopsony Model

Three Union Models

Bilateral Monopoly Model

Minimum Wage Controversy

Wage Differentials

Pay For Performance

Key Terms

PreviousSlide

NextSlide

EndShow

WAGE INCREASESAND UNEMPLOYMENT

• Union members receive about 15% higher wages

• Negative impact on level of employment

Negative unemployment effect reduced by:

GrowthElasticity

Page 25: Wage determination

28 - 25Copyright McGraw-Hill/Irwin, 2002

Labor, Wages, and Earnings

General Level of Wages

Real Wages and Productivity

Purely Competitive Labor Market

Monopsony Model

Three Union Models

Bilateral Monopoly Model

Minimum Wage Controversy

Wage Differentials

Pay For Performance

Key Terms

PreviousSlide

NextSlide

EndShow

BILATERAL MONOPOLY MODELMonopsonist & Union SeekDifferent Wage Rates...

…economic theorycannot

determine the actual outcome.

Wu

Wag

e R

ate

(do

llar

s)

D

Quantity of Labor

Wc

Qc

D

S

Qu=Qm

Wm

Page 26: Wage determination

28 - 26Copyright McGraw-Hill/Irwin, 2002

Labor, Wages, and Earnings

General Level of Wages

Real Wages and Productivity

Purely Competitive Labor Market

Monopsony Model

Three Union Models

Bilateral Monopoly Model

Minimum Wage Controversy

Wage Differentials

Pay For Performance

Key Terms

PreviousSlide

NextSlide

EndShow

Wu

Wag

e R

ate

(do

llar

s)

D

Quantity of Labor

Wc

Qc

BILATERAL MONOPOLY MODELMonopsonist & Union SeekDifferent Wage Rates...

D

S

…economic theorycannot

determine the actual outcome.

Qu=Qm

Wm

Desirability of Bilateral Monopoly

Page 27: Wage determination

28 - 27Copyright McGraw-Hill/Irwin, 2002

Labor, Wages, and Earnings

General Level of Wages

Real Wages and Productivity

Purely Competitive Labor Market

Monopsony Model

Three Union Models

Bilateral Monopoly Model

Minimum Wage Controversy

Wage Differentials

Pay For Performance

Key Terms

PreviousSlide

NextSlide

EndShow

MINIMUM WAGECONTROVERSY

•Case Against Minimum Wage

•Case For Minimum Wage

•Evidence and Conclusions

Page 28: Wage determination

28 - 28Copyright McGraw-Hill/Irwin, 2002

Labor, Wages, and Earnings

General Level of Wages

Real Wages and Productivity

Purely Competitive Labor Market

Monopsony Model

Three Union Models

Bilateral Monopoly Model

Minimum Wage Controversy

Wage Differentials

Pay For Performance

Key Terms

PreviousSlide

NextSlide

EndShow

WAGE DIFFERENTIALSMarginal Revenue Productivity

Noncompeting Groups•Ability•Education and Training

•Investment in Human Capital

Page 29: Wage determination

28 - 29Copyright McGraw-Hill/Irwin, 2002

Labor, Wages, and Earnings

General Level of Wages

Real Wages and Productivity

Purely Competitive Labor Market

Monopsony Model

Three Union Models

Bilateral Monopoly Model

Minimum Wage Controversy

Wage Differentials

Pay For Performance

Key Terms

PreviousSlide

NextSlide

EndShow

WAGE DIFFERENTIALSCompensating Differences

•Nonmonetary DifferencesMarket Imperfections

•Lack of Job Information•Geographical Immobility•Unions & Government Restraints

•Discrimination

Page 30: Wage determination

28 - 30Copyright McGraw-Hill/Irwin, 2002

Labor, Wages, and Earnings

General Level of Wages

Real Wages and Productivity

Purely Competitive Labor Market

Monopsony Model

Three Union Models

Bilateral Monopoly Model

Minimum Wage Controversy

Wage Differentials

Pay For Performance

Key Terms

PreviousSlide

NextSlide

EndShow

PAY FOR PERFORMANCE

The Principal-Agent Problem

Incentive Pay Plan• Piece Rates• Commissions or Royalties• Bonuses, Stock Options, &

Profit Sharing• Efficiency Wages

Page 31: Wage determination

28 - 31Copyright McGraw-Hill/Irwin, 2002

Labor, Wages, and Earnings

General Level of Wages

Real Wages and Productivity

Purely Competitive Labor Market

Monopsony Model

Three Union Models

Bilateral Monopoly Model

Minimum Wage Controversy

Wage Differentials

Pay For Performance

Key Terms

PreviousSlide

NextSlide

EndShow

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 Hiring Opportunities

Page 32: Wage determination

28 - 32Copyright McGraw-Hill/Irwin, 2002

Labor, Wages, and Earnings

General Level of Wages

Real Wages and Productivity

Purely Competitive Labor Market

Monopsony Model

Three Union Models

Bilateral Monopoly Model

Minimum Wage Controversy

Wage Differentials

Pay For Performance

Key Terms

PreviousSlide

NextSlide

EndShow

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 Hiring Opportunities

ChapterConclusions

Page 33: Wage determination

nominal wagereal wagepurely competitive labor marketmonopsonyexclusive unionismoccupational licensinginclusive unionism

bilateral monopolyminimum wagewage differentialsmarginal revenue

productivitynoncompeting groupsinvestment in human capitalcompensating differences incentive pay plan

ENDBACKCopyright McGraw-Hill/Irwin 2002

Page 34: Wage determination

28 - 34Copyright McGraw-Hill/Irwin, 2002

Labor, Wages, and Earnings

General Level of Wages

Real Wages and Productivity

Purely Competitive Labor Market

Monopsony Model

Three Union Models

Bilateral Monopoly Model

Minimum Wage Controversy

Wage Differentials

Pay For Performance

Key Terms

PreviousSlide

NextSlide

EndShow

Next:

Rent, Interest, and Profits

Chapter 29