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
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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
qC
(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
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•
•
•
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