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Chapter 13 - Wage determination. Learning objectives of this chapter include: Explain why labor productivity and real hourly compensation track so closely over time, show how wage rates and employment levels are determined in competitive labor markets, demonstrate how monopsony (a market with a single employer) can reduce wages below competitive levels,...
Chapter 13 Wage Determination McGrawưHill/Irwin Copyrightâ2009byTheMcGrawưHillCompanies,Inc.Allrightsreserved Chapter Objectives Labor productivity and real compensation • Wage and employment determination • Competitive and monopsony markets • Unions and wage rates • Causes of wage differentials • “Pay-for-Performance” plans 13-2 Labor Wages and Earnings • Wages – Price paid for labor – Direct pay plus fringe benefits • • • • Wage rate Nominal wage Real wage General level of wages 13-3 Level of Wages Across Nations Hourly Wages of Production Workers Hourly Pay in U.S Dollars, 2006 10 15 20 25 30 35 Germany Sweden Switzerland United Kingdom Australia Canada Italy France United States Japan Spain Korea Taiwan Mexico Source: U.S. Bureau of Labor Statistics, 2006 13-4 Role of Productivity • Labor demand depends on productivity • U.S labor highly productive – Plentiful capital – Access to abundant natural resources – Advanced technology – Labor quality – Other factors 13-5 Real Wages • Long run trend of average real wages in the U.S Real Wage Rate (Dollars) – Variation across occupations S2020 S1900 D1900 S1950 D1950 S2000 D2000 Quantity of Labor D2020 13-6 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 13-7 Competitive Labor Market Labor Market Individual Firm a ($10) WC ($10) WC D=MRP (∑ mrp’s) Wage Rate (Dollars) Wage Rate (Dollars) S QC (1000) Quantity of Labor e b c s=MRC d=mrp qC (5) Quantity of Labor 13-8 Monopsony Model • Employer has buying power • Characteristics – Single buyer – Labor immobile – Firm “wage maker” • Firm labor supply upward sloping • MRC higher than wage rate • Equilibrium 13-9 Monopsony Model Wage Rate (Dollars) MRC S b a Wc Wm c MRP Qm Qc Quantity of Labor • Examples of monopsony power 13-10 Craft Union Model • Effectively reduce supply labor – Restrict immigration – Reduce child labor – Compulsory retirement – Shorter workweek • Exclusive unionism • Occupational licensing 13-12 Craft Union Model Wage Rate (Dollars) S2 S1 Decrease In Supply Wu Wc D Qu Qc Quantity of Labor 13-13 Industrial Union Model • Inclusive unionism – Auto and steel workers Wage Rate (Dollars) S Wu a b e Wc D Qu Qc Qe Quantity of Labor 13-14 Union Models • Are unions successful? • Wages 15% higher on average • Consequences: – Higher unemployment – Restricted ability to demand higher wages 13-15 Bilateral Monopoly • Monopsony and inclusive unionism • Single buyer and seller • Not uncommon • Indeterminate outcome • Desirability 13-16 Bilateral Monopoly S Wage Rate (Dollars) MRC Wu a Wc Wm D=MRP Qu=Qm Qc Quantity of Labor 13-17 Minimum Wage • • • • Case against minimum wage Case for minimum wage State and locally set rates Evidence and conclusions 13-18 Wage Differentials Average Annual Wages, 2007 Occupation Surgeons Aircraft Pilots Petroleum Engineers Financial Managers Law Professors Chemical Engineers Dental Hygienists Registered Nurses Police Officers Electricians Travel Agents Barbers Retail Salespersons Recreation Workers Teacher Aides Fast Food Cooks Annual Average Wages $191,410 148,810 113,890 106,200 95,510 84,240 64,910 62,480 50,670 48,100 32,190 25,860 24,530 23,790 22,820 16,860 Source: Bureau of Labor Statistics, 2006 13-19 Labor Supply and Demand • • • • Differences across occupations Explains wage differentials Marginal revenue productivity Noncompeting groups –Ability –Education and training • Compensating differences 13-20 Education and Annual Earnings Annual Earnings (Thousands of Dollars) 160,000 140,000 Educational Attainment 120,000 Professional Degree 100,000 80,000 Bachelor’s Degree 60,000 Associate’s Degree 40,000 High School Diploma 20,000 18-24 25-34 35-44 45-54 Age 55-64 65+ 13-21 Wage Differentials • Workers prevented from moving to higher paying jobs • Market imperfections – Lack of job information – Geographic immobility – Unions and government restraints – Discrimination 13-22 Pay for Performance • The principal-agent problem – Incentive pay plan – Piece rates – Commissions or royalties – Bonuses, stock options, and profit Sharing – Efficiency wages • Negative side-effects 13-23 Are CEOs Overpaid? • • • • U.S CEO salaries relatively high Good decisions enhance productivity Limited supply, high MRP Incentive to raise productivity at all levels • High salary bias by board members • Unsettled issue 13-24 Key Terms • wage rate • minimum wage • nominal wage • wage differentials • real wage • marginal revenue productivity • purely competitive labor market • noncompeting groups • monopsony • human capital • exclusive unionism • compensating differences • occupational licensing • incentive pay plan • inclusive unionism • bilateral monopoly 13-25 Next Chapter Preview… Rent, Interest, and Profit 13-26 ... Bachelor’s Degree 60,000 Associate’s Degree 40,000 High School Diploma 20,000 1 8-2 4 2 5-3 4 3 5-4 4 4 5-5 4 Age 5 5-6 4 65+ 1 3- 21 Wage Differentials • Workers prevented from moving to higher paying jobs... “Pay-for-Performance” plans 1 3- 2 Labor Wages and Earnings • Wages – Price paid for labor – Direct pay plus fringe benefits • • • • Wage rate Nominal wage Real wage General level of wages 1 3- 3... Exclusive unionism • Occupational licensing 1 3- 12 Craft Union Model Wage Rate (Dollars) S2 S1 Decrease In Supply Wu Wc D Qu Qc Quantity of Labor 1 3- 13 Industrial Union Model • Inclusive unionism