Chapter 26 Wage Determination Presentation 1 Labor Broadly

Chapter 26 -Wage Determination Presentation 1

Labor • • Broadly defined as: 1. Blue and white collar workers 2. Professionals- doctors, lawyers 3. Owners of small businesses

Wages • Hourly pay, annual salaries, bonuses, commissions, royalties, and fringe benefits (vacations, health insurance, pensions) • Wage Rate- Price paid per hour of service

Nominal v Real Wage • Nominal Wage- the amount of money received per hour, day, or year • Real Wage- the quantity of goods and services a worker can obtain with nominal wages---the “purchasing power” of nominal wages

Real Wages Cont’d • Real wages depend on your nominal wage and the price of goods/services you purchase • Ex- you receive a 5% raise in nominal wages but the price of goods goes up 3% • *** your real wages increase by 2%

Labor Wages and Earnings GLOBAL PERSPECTIVE Hourly Wages of Production Workers Selected Nations Hourly Pay in U. S. Dollars, 2004 0 Denmark Germany Switzerland Sweden United Kingdom France United States Australia Japan Canada Italy Korea Taiwan Mexico 5 10 15 20 25 30 35 33. 75 32. 53 30. 26 28. 42 24. 71 23. 89 23. 17 23. 09 21. 90 21. 42 20. 48 11. 52 5. 97 2. 50 Source: U. S. Bureau of Labor Statistics, 2006

Reasons for High Productivity • • 1. large amounts of physical capital 2. access to abundant natural resources 3. advanced technology 4. labor quality-better health, education and training • 5. other factors such as work environment and flexible management

Real Wages and Productivity • Over long periods of time, productivity and real wages tend to rise together

Purely Competitive Labor Market • 1. numerous firms compete with one another in hiring a specific type of labor • 2. many workers with identical skills supplying the same type of labor • 3. individual firms and workers are “wage takers”

Market Demand for Labor • To find the total or market demand curve for a particular labor service, sum horizontally the labor demand curves (the marginal revenue product curves) of the individual firms Labor Market S ($10) WC D=MRP (∑ mrps) 0 QC (1000) Quantity of Labor

Market Supply of Labor • The supply curve slopes upward, indicating the employers as a group must pay higher wage rates to obtain more workers • The higher wages are used to attract workers away from other industries and locales

Labor Market Equilibrium • The intersection of the market labor demand curve and the market supply curve determines the equilibrium wage rate and level of employment S ($10) WC D=MRP (∑ mrps) 0 QC (1000) Quantity of Labor

Individual Firm Wage Rate (Dollars) • The individual firm in a perfectly competitive firm maximizes profit by hiring workers to the point where Wage rate = MRP s=MRC ($10) WC 0 c d=mrp q. C (5) Quantity of Labor

Monopsony A single employer of labor has substantial buying (hiring power) with the following characteristics: 1. Only a single buyer of a particular good 2. Labor is immobile (workers would have to move or acquire new skills) 3. The firm is a wage maker **monopsony power can vary

Monopsony Model Monopsonistic Labor Market Wage Rate (Dollars) MRC W 14. 1 S b a Wc Wm c MRP 0 Qm Qc Quantity of Labor Examples of Monopsony Power

Examples of Monopsonies • • Some markets such as: nurses: one hospital professional athletes: drafts public school teachers: only one school

MRC Higher than Wage Rate • When a monopsonist pays a higher wage to attract new workers, it must pay more to current workers as well • Ex- one worker can be hired @ $6 and a second worker can be hired for $7 • Therefore the Marginal Resource Cost of the second worker is $8…the $7 plus the $1 raise to worker #1