In this chapter we examine how wages are determined in competitive markets and imperfectly competitive markets. We look at factors that impact wages, including the influence of unions. We will analyze wage differences with union models including craft unions and industrial unions. We will discuss reasons for wage differentials across jobs and analyze the effects of the minimum wage on the labor market.
Web Chapter A Wage Determination McGrawHill/Irwin Copyright © 2013 by The McGrawHill Companies, Inc. All rights reserved Copyright © 2014 by The McGrawHill Companies, Inc. All rights reserved 11 Labor Demand • Labor is the most important of the • resources used by firms Labor demand is a derived demand; thus it depends on • the productivity of labor • the price of the good or service it helps produce WCA2 Labor Demand • Marginal revenue product (MRP) of labor is the change in a firm’s total revenue when it employs one more unit of labor MRP = Change in total labor Unit change in labor WCA3 Labor Demand $14 12 10 D = MRP 2 WCA4 Labor Demand • Marginal resource cost (MRC) is the change in a firm’s total cost when it employs one more unit of labor MRC = Change in total (labor) cost Unit change in labor WCA5 Labor Demand • Rule for employing labor • MRP = MRC Hire additional units of labor up to the point at which labor’s MRP is equal to its MRC WCA6 Market Demand for Labor • Changes in product demand • Changes in productivity • Changes in the prices of other resources WCA7 Occupational Employment Trends • Rising employment • Services • Health care • Computers • Declining employment • Labor-saving technological change • Textiles WCA8 Employment Trends 10 Fastest-Growing U.S Occupations in Percentage Terms, 2008–2018 Employment, Thousands of Jobs 2008 2018 Percentage Increase* Biomedical engineers 16 28 72.0 Network systems and data communications analysts 292 448 53.4 Home health aides 922 1,383 50.0 Personal and home care aides 817 1,193 46.0 Financial examiners 27 38 41.2 Medical scientists, except epidemiologists 109 154 40.4 Physicians assistants 75 104 39.0 Skin care specialists 39 54 37.9 Biochemists and biophysicists 23 32 37.4 Athletic trainers 16 22 37.0 Occupation Source: Bureau of Labor Statistics, www.bls.gov WCA9 Employment Trends 10 Most Rapidly Declining U.S Occupations in Percentage Terms, 2008–2018 Employment, Thousands of Jobs 2008 2018 Percentage Increase Textile machine workers 35 21 -40.7 Sewing machine operators 212 141 -33.7 Postal service workers 180 125 -30.3 Lathe operators 56 41 -26.7 Order clerks 246 182 -26.1 Photographic processing machine operators 51 39 -24.3 File clerks 212 163 -23.4 Machine feeders and offbearers 141 110 -22.2 Paper goods machine setters operators, tenders 103 81 -21.5 Computer operators 110 90 -18.6 Occupation WCA10 Market Supply of Labor Labor Market Individual Firm ($10) WC s = MRC ($10) WC D = MRP (∑ mrps) Wage Rate (Dollars) Wage Rate (Dollars) S QC (1000) Quantity of Labor d = mrp qC (5) Quantity of Labor WCA13 Wage and Employment Determination The Supply of Labor: Pure Competition in the Hire of Labor (1) Units of Labor (2) Wage Rate (3) Total Labor Cost (Wage Bill) (4) Marginal Resource (Labor) Cost $10 $0 10 10 $10 10 20 10 10 30 10 10 40 10 10 50 10 10 60 10 WCA14 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 WCA15 Monopsony Model Examples of monopsony power MRC Wage Rate (Dollars) • S b a Wc Wm c MRP Qm Qc Quantity of Labor WCA16 Monopsony Power • Maximize profit by hiring smaller • • number of workers Examples of monopsony power • Nurses • Professional athletes • Teachers Three union models WCA17 Union Models WCA18 Craft Union Model • Effectively reduces supply of labor • Restricts immigration • Reduces child labor • Encourages compulsory retirement • Enforces shorter workweek • Exclusive unionism • Occupational licensing WCA19 Craft Union Model Wage Rate (Dollars) S2 S1 Decrease In Supply Wu Wc D Qu Qc Quantity of Labor WCA20 Industrial Union Model Inclusive unionism • Auto and steel workers S Wage Rate (Dollars) • Wu a b e Wc D Qu Qc Qe Quantity of Labor WCA21 Union Models • Are unions successful? • Wages 15 percent higher on • average Consequences: • Higher unemployment • Restricted ability to demand higher wages WCA22 Wage Differentials Average Annual Wages in Selected Occupations Occupation Average Annual Wages Surgeons $225,390 Petroleum engineers 127,970 Financial managers 116,970 Aircraft pilots 115,300 Law professors 107,990 Chemical engineers 94,590 Dental hygienists 68,680 Registered nurses 67,720 Police officers 55,620 Electricians 51,810 Travel agents 33,950 Barbers 27,930 Recreation workers 25,270 Retail salespersons 25,000 Teacher aides 24,880 Fast-food cooks 18,540 WCA23 Wage Differentials W W Sa Sb Wa (a) (b) Da Wb Db Qa Q Qb Q W W Sc (c) (d) Wc Sd Wd Dc Qc Q Dd Qd Q WCA24 Wage Differentials • Differences across occupations • What explains wage differentials? • Marginal revenue productivity • Noncompeting groups • Ability • Education and training • Compensating differences WCA25 Wage Differentials WCA26 The Minimum Wage Controversy • Case against minimum wage • Case for minimum wage • State and locally set rates • Evidence and conclusions WCA27 ... Occupation WCA10 Elasticity of Labor Demand Ew = Percentage change in labor quantity demanded Percentage change in wage rate • Ease of resource substitutability • Elasticity of product demand... Restricted ability to demand higher wages WCA22 Wage Differentials Average Annual Wages in Selected Occupations Occupation Average Annual Wages Surgeons $225,390 Petroleum engineers 127,970 Financial... Quantity of Labor WCA13 Wage and Employment Determination The Supply of Labor: Pure Competition in the Hire of Labor (1) Units of Labor (2) Wage Rate (3) Total Labor Cost (Wage Bill) (4) Marginal