Chapter 15. Wage Determination

Chapter 15Wage DeterminationCopyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.WagesPrice paid for laborDirect pay plus fringe benefits Wage rateNominal wageReal wageGeneral level of wagesLabor, Wages, and EarningsLO1Role of ProductivityLabor demand depends on productivityU.S. labor is highly productivePlentiful capitalAccess to abundant natural resourcesAdvanced technologyLabor qualityOther factorsLO1Competitive Labor MarketMarket demand for laborSum of firm demandExample: carpentersMarket supply for laborUpward slopingCompetition among industriesLabor market equilibriumMRP = MRC ruleLO2Monopsony ModelEmployer has buying powerCharacteristicsSingle buyerLabor immobileFirm is a “wage maker”Upsloping labor supply to firmMRC higher than wage rateEquilibrium LO3Monopsony PowerMaximize profit by hiring smaller number of workersExamples of monopsony powerNursesProfessional AthletesTeachersThree union modelsLO3Demand Enhancement ModelUnion modelIncrease demand for union labor by altering price of other inputsWage Rate (Dollars)Quantity of LaborWuQcQuWcD1D2SIncreaseIn DemandLO4Craft Union ModelEffectively reduce supply of laborRestrict immigrationReduce child laborCompulsory retirementShorter workweekExclusive unionismOccupational licensingLO4Industrial Union ModelInclusive unionismAuto and steel workersWage Rate (Dollars)Quantity of LaborDSQcWcWuQuQeabeLO4Wage Increases and Job LossAre unions successful?Wages 15% higher on averageConsequences:Higher unemploymentRestricted ability to demand higher wagesLO4Bilateral Monopoly ModelMonopsony and inclusive unionismSingle buyer and sellerNot uncommonIndeterminate outcomeDesirability LO5The Minimum Wage ControversyCase against minimum wageCase for minimum wageState and locally set ratesEvidence and conclusionsLO6Wage DifferentialsLO7Wage DifferentialsDifferences across occupationsWhat explains wage differentials?Marginal revenue productivityNoncompeting groupsAbilityEducation and trainingCompensating differencesLO7Wage DifferentialsWorkers prevented from moving to higher paying jobsMarket imperfectionsLack of job informationGeographic immobilityUnions and government restraintsDiscriminationLO7Pay for PerformanceThe principal-agent problem Incentive pay planPiece ratesCommissions or royaltiesBonuses, stock options, and profit sharingEfficiency wagesNegative side-effectsLO8