Labor Wages and Earnings General Level of Wages

Labor, Wages, and Earnings General Level of Wages Real Wages and Productivity Purely Competitive Labor Market 15 CHAPTER Monopsony Model Three Union Models Bilateral Monopoly Model Minimum Wage Controversy Wage Differentials Pay For Performance Key Terms Previous Slide End Show 15 - 1 Next Slide HELP D E T N WA Wage Determination Copyright Mc. Graw-Hill/Irwin, 2002

LABOR, WAGES, AND EARNINGS Labor, Wages, and Earnings General Level of Wages Real Wages and Productivity Purely Competitive Labor Market Monopsony Model Three Union Models Bilateral Monopoly Model Wages Defined. . . Wages - - Salary - - Earnings Nominal Wages Minimum Wage Controversy Wage Differentials Pay For Performance Key Terms Previous Slide End Show 15 - 2 Next Slide Real Wages International difference Copyright Mc. Graw-Hill/Irwin, 2002

GLOBAL PERSPECTIVE 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 Previous Slide End Show 15 - 3 Next Slide Hourly Wages of Production Workers, Selected Nations 0 Germany Switzerland Denmark Sweden Japan United States France Italy United Kingdom Australia Canada Korea Taiwan Portugal Hourly Pay in U. S. Dollars, 1999 4 8 12 16 20 24 28 Copyright Mc. Graw-Hill/Irwin, 2002 Source: U. S. Bureau of Labor Statistics 32

GENERAL LEVEL OF WAGES 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 Previous Slide End Show 15 - 4 Next Slide Role of Productivity • Plentiful Capital • Abundant Natural Resources • Advanced Technology • Labor Quality • Intangible Factors Copyright Mc. Graw-Hill/Irwin, 2002

Labor, Wages, and Earnings General Level of Wages Real Wages and Productivity Purely Competitive Labor Market REAL WAGES AND PRODUCTIVITY Growth in real income (earnings) Growth in output per worker-hour Monopsony Model Three Union Models Bilateral Monopoly Model Minimum Wage Controversy Wage Differentials Pay For Performance Key Terms Previous Slide End Show 15 - 5 Next Slide Can only grow at about the same rate! Secular Growth of Real Wages Copyright Mc. Graw-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 Previous Slide End Show 15 - 6 PURELY COMPETITIVE LABOR MARKET Purely competitive labor market: Many Firms Numerous Qualified Workers “Wage Taker” Behavior Market Demand for Labor Next Slide Market Supply of Labor Copyright Mc. Graw-Hill/Irwin, 2002

Labor, Wages, and Earnings LABOR SUPPLY AND DEMAND PURELY COMPETITIVE MARKET S General Level of Wages Purely Competitive Labor Market Monopsony Model Three Union Models Bilateral Monopoly Model Minimum Wage Controversy Wage Differentials Pay For Performance Key Terms Wage Rate (dollars) Real Wages and Productivity $10 Wc D = MRP ( mrp’s) Wc Non. Labor Costs Includes Normal Profit S = MRC ($10) Labor Costs d = mrp Previous Slide End Show 15 - 7 Next Slide (1000) Quantity of Labor Market Copyright Mc. Graw-Hill/Irwin, 2002 (5) Quantity of Labor Individual Firm

Labor, Wages, and Earnings LABOR SUPPLY AND DEMAND PURELY COMPETITIVE MARKET S General Level of Wages Purely Competitive Labor Market Monopsony Model Three Union Models Bilateral Monopoly Model Minimum Wage Controversy Wage Differentials Pay For Performance Key Terms Wage Rate (dollars) Real Wages and Productivity Wc Includes Marginal Resource. Normal Cost (MRC) will be. Profit Non. Labor Costs constant and equal to Wprice $10 resource (the wage rate) Labor S = MRC ($10) c D = MRP ( mrp’s) Costs d = mrp Previous Slide End Show 15 - 8 Next Slide (1000) Quantity of Labor Market Copyright Mc. Graw-Hill/Irwin, 2002 (5) Quantity of Labor Individual Firm

MONOPSONY MODEL 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 Previous Slide End Show 15 - 9 Next Slide • Single Buyer of a type of labor • The type of labor is relatively immobile “Wage Maker” Behavior Upward-Sloping Supply Curve to Firm Copyright Mc. Graw-Hill/Irwin, 2002

MONOPSONISTIC LABOR MARKET Labor, Wages, and Earnings General Level of Wages S Purely Competitive Labor Market Monopsony Model Three Union Models Bilateral Monopoly Model Minimum Wage Controversy Wage Differentials Pay For Performance Wage Rate (dollars) Real Wages and Productivity In monopsony MRC lies above the supply curve Key Terms Previous Slide End Show 15 - 10 Next Slide Quantity of Labor Copyright Mc. Graw-Hill/Irwin, 2002

MONOPSONISTIC LABOR MARKET Labor, Wages, and Earnings MRC General Level of Wages S Purely Competitive Labor Market Monopsony Model Three Union Models Bilateral Monopoly Model Minimum Wage Controversy Wage Differentials Pay For Performance Wage Rate (dollars) Real Wages and Productivity MRP = MRC Wm MRP Qm units of labor hired Key Terms Previous Slide End Show 15 - 11 Next Slide Qm Quantity of Labor Copyright Mc. Graw-Hill/Irwin, 2002

MONOPSONISTIC LABOR MARKET Labor, Wages, and Earnings MRC General Level of Wages Purely Competitive Labor Market Monopsony Model Three Union Models Bilateral Monopoly Model Minimum Wage Controversy Wage Differentials Pay For Performance Wage Rate (dollars) Real Wages and Productivity The competitive solution would result in a higher wage and greater employment Wc Wm MRP Key Terms Previous Slide End Show 15 - 12 S Next Slide Qm Qc Quantity of Labor Copyright Mc. Graw-Hill/Irwin, 2002

MONOPSONISTIC LABOR MARKET Labor, Wages, and Earnings MRC General Level of Wages Purely Competitive Labor Market Monopsony Model Three Union Models Bilateral Monopoly Model Minimum Wage Controversy Wage Differentials Pay For Performance Key Terms Previous Slide End Show 15 - 13 Wage Rate (dollars) Real Wages and Productivity S Monopsonists maximize The competitive solution would profits by hiring a smaller result in a higher number of workerswage andand greater Wc Wthereby paying a less-thanemployment m MRP competitive wage rate. Next Slide Qm Qc Quantity of Labor Copyright Mc. Graw-Hill/Irwin, 2002

THREE UNION MODELS Labor, Wages, and Earnings Demand-Enhancement Model General Level of Wages Purely Competitive Labor Market Monopsony Model Three Union Models Bilateral Monopoly Model Minimum Wage Controversy Wage Differentials Pay For Performance Key Terms Previous Slide End Show 15 - 14 S Wage Rate (dollars) Real Wages and Productivity Wc D 1 Next Slide Qc Quantity of Labor Copyright Mc. Graw-Hill/Irwin, 2002

THREE UNION MODELS Labor, Wages, and Earnings Demand-Enhancement Model General Level of Wages Purely Competitive Labor Market Monopsony Model Three Union Models Bilateral Monopoly Model Minimum Wage Controversy Wage Differentials Pay For Performance Key Terms Previous Slide End Show 15 - 15 S Wage Rate (dollars) Real Wages and Productivity . . . by increasing product demand Wu Wc D 2 D 1 Next Slide Qc Qu Quantity of Labor Copyright Mc. Graw-Hill/Irwin, 2002

THREE UNION MODELS Labor, Wages, and Earnings . . . by increasing product demand S. . . by increasing productivity Demand-Enhancement Model 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 Previous Slide End Show 15 - 16 Wage Rate (dollars) General Level of Wages Wu Wc D 2 D 1 Next Slide Qc Qu Quantity of Labor Copyright Mc. Graw-Hill/Irwin, 2002

THREE UNION MODELS Labor, Wages, and Earnings . . . by increasing product demand S. . . by increasing productivity. . . by increasing the price of substitutes Demand-Enhancement Model 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 Previous Slide End Show 15 - 17 Wage Rate (dollars) General Level of Wages Wu Wc D 2 D 1 Next Slide Qc Qu Quantity of Labor Copyright Mc. Graw-Hill/Irwin, 2002

THREE UNION MODELS Labor, Wages, and Earnings Exclusive or Craft Model 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 Previous Slide End Show 15 - 18 Wage Rate (dollars) General Level of Wages S 1 Wc D Next Slide Qc Quantity of Labor Copyright Mc. Graw-Hill/Irwin, 2002

THREE UNION MODELS Labor, Wages, and Earnings Exclusive or Craft Model 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 Previous Slide End Show 15 - 19 Wage Rate (dollars) General Level of Wages . . . restrictive S 2 membership S 1 policies Wu Wc D Next Slide Qu Qc Quantity of Labor Copyright Mc. Graw-Hill/Irwin, 2002

THREE UNION MODELS Labor, Wages, and Earnings Exclusive or Craft Model 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 Previous Slide End Show 15 - 20 Wage Rate (dollars) General Level of Wages . . . restrictive S 2 membership S 1 policies. . . restricting labor supply of the economy as a whole Wu Wc D Next Slide Qu Qc Quantity of Labor Copyright Mc. Graw-Hill/Irwin, 2002

THREE UNION MODELS Labor, Wages, and Earnings Exclusive or Craft Model 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 Previous Slide End Show 15 - 21 Wage Rate (dollars) General Level of Wages Wu Wc . . . restrictive S 2 membership S 1 policies. . . restricting labor supply of the economy as a whole …occupational licensing D Next Slide Qu Qc Quantity of Labor Copyright Mc. Graw-Hill/Irwin, 2002

THREE UNION MODELS Labor, Wages, and Earnings Inclusive or Industrial Model 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 Previous Slide End Show 15 - 22 Wage Rate (dollars) General Level of Wages . . . by organizing S virtually all workers and thereby control of the supply curve for labor causing… Wc D Next Slide Qc Quantity of Labor Copyright Mc. Graw-Hill/Irwin, 2002

THREE UNION MODELS Labor, Wages, and Earnings Inclusive or Industrial Model 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 Previous Slide End Show 15 - 23 Wage Rate (dollars) General Level of Wages Wu . . . by organizing S virtually all workers and thereby control of the supply curve for labor causing… Wc D Next Slide Qu Qc Quantity of Labor Copyright Mc. Graw-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 Previous Slide End Show 15 - 24 Next Slide WAGE INCREASES AND UNEMPLOYMENT • Union members receive about 15% higher wages • Negative impact on level of employment Negative unemployment effect reduced by: Growth Elasticity Copyright Mc. Graw-Hill/Irwin, 2002

BILATERAL MONOPOLY MODEL Monopsonist & Union Seek Different Wage Rates. . . Labor, Wages, and Earnings General Level of Wages Purely Competitive Labor Market Monopsony Model Three Union Models Bilateral Monopoly Model Minimum Wage Controversy Wage Differentials Pay For Performance Key Terms Previous Slide End Show 15 - 25 S Wage Rate (dollars) Real Wages and Productivity …economic theory cannot determine the actual outcome. Wu Wc Wm D Next Slide Qu=Qm Qc Quantity of Labor Copyright Mc. Graw-Hill/Irwin, 2002

BILATERAL MONOPOLY MODEL Monopsonist & Union Seek Different Wage Rates. . . Labor, Wages, and Earnings General Level of Wages Purely Competitive Labor Market Monopsony Model Three Union Models Bilateral Monopoly Model Minimum Wage Controversy Wage Differentials Pay For Performance Key Terms Previous Slide End Show 15 - 26 S Wage Rate (dollars) Real Wages and Productivity …economic theory cannot determine the actual outcome. Wu Wc Wm D Next Slide Desirability. Qof=QBilateral Monopoly Q u m c Quantity of Labor Copyright Mc. Graw-Hill/Irwin, 2002

Labor, Wages, and Earnings MINIMUM WAGE CONTROVERSY General Level of Wages Real Wages and Productivity Purely Competitive Labor Market • Case Against Minimum Wage Monopsony Model Three Union Models Bilateral Monopoly Model Minimum Wage Controversy • Case For Minimum Wage Differentials Pay For Performance Key Terms Previous Slide End Show 15 - 27 Next Slide • Evidence and Conclusions Copyright Mc. Graw-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 Previous Slide End Show 15 - 28 Next Slide WAGE DIFFERENTIALS Marginal Revenue Productivity Noncompeting Groups • Ability • Education and Training • Investment in Human Capital Copyright Mc. Graw-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 Previous Slide End Show 15 - 29 Next Slide WAGE DIFFERENTIALS Compensating Differences • Nonmonetary Differences Market Imperfections • Lack of Job Information • Geographical Immobility • Unions & Government Restraints • Discrimination Copyright Mc. Graw-Hill/Irwin, 2002

PAY FOR PERFORMANCE 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 Previous Slide End Show 15 - 30 Next Slide The Principal-Agent Problem Incentive Pay Plan • Piece Rates • Commissions or Royalties • Bonuses, Stock Options, & Profit Sharing • Efficiency Wages Copyright Mc. Graw-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 Previous Slide End Show 15 - 31 Next Slide PAY FOR PERFORMANCE Negative 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 Copyright Mc. Graw-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 Previous Slide End Show 15 - 32 Next Slide PAY FOR PERFORMANCE Negative 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 Chapter Conclusions Copyright Mc. Graw-Hill/Irwin, 2002

nominal wage real wage purely competitive labor market monopsony exclusive unionism occupational licensing inclusive unionism Copyright Mc. Graw-Hill/Irwin 2002 bilateral monopoly minimum wage differentials marginal revenue productivity noncompeting groups investment in human capital compensating differences incentive pay plan BACK END

Labor, Wages, and Earnings General Level of Wages Next: Real Wages and Productivity Purely Competitive Labor Market Monopsony Model Three Union Models Bilateral Monopoly Model Rent, Interest, and Profits Minimum Wage Controversy Wage Differentials Pay For Performance Key Terms Previous Slide End Show 15 - 34 Chapter 29 Next Slide Copyright Mc. Graw-Hill/Irwin, 2002