Labor, Wages, and
Earnings
General Level of
Wages
Real Wages and
Productivity
Purely Competitive
Labor Market
15
C HAPTE R
Monopsony Model
Three Union Models
Bilateral Monopoly
Model
Minimum Wage
Controversy
Wage Differentials
Pay For Performance
Key Terms
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Wage
Determination
Copyright McGraw-Hill/Irwin, 2005
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
Minimum Wage
Controversy
Wage Differentials
Pay For Performance
Key Terms
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End
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Wages Defined...
Wages - - Salary - - Earnings
Wage Rate
Nominal Wages
Real Wages
International differences...
Copyright McGraw-Hill/Irwin, 2005
GLOBAL PERSPECTIVE
Labor, Wages, and
Earnings
General Level of
Wages
Hourly Wages of Production Workers,
Selected Nations
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
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Germany
Denmark
Switzerland
United States
Japan
Sweden
United Kingdom
France
Canada
Italy
Australia
Korea
Taiwan
Mexico
0
Hourly Pay in U.S. Dollars, 2001
5
10
15
20
25
Source: U.S. Bureau of Labor Statistics, 2003
Copyright McGraw-Hill/Irwin, 2005
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
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Role of Productivity
• Plentiful Capital
• Access to Abundant
Natural Resources
• Advanced Technology
• Labor Quality
• Other Factors
Copyright McGraw-Hill/Irwin, 2005
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
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Can only grow at
about the same rate!
Secular Growth of Real Wages
Copyright McGraw-Hill/Irwin, 2005
Labor, Wages, and
Earnings
General Level of
Wages
Real Wages and
Productivity
Purely Competitive
Labor Market
PURELY COMPETITIVE
LABOR MARKET
Purely competitive labor market:
Many Firms
Monopsony Model
Three Union Models
Bilateral Monopoly
Model
Minimum Wage
Controversy
Wage Differentials
Numerous Qualified Workers
“Wage Taker” Behavior
Pay For Performance
Key Terms
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End
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Market Demand for Labor
Next
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Market Supply of Labor
Copyright McGraw-Hill/Irwin, 2005
Labor, Wages, and
Earnings
PURELY COMPETITIVE LABOR
MARKET EQUILIBRIUM
S
General Level of
Wages
Includes
Normal
Profit
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
$10
Wc
D = MRP
( mrp’s)
Key Terms
Wc
NonLabor
Costs
S = MRC
($10)
Labor
Costs
d = mrp
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(1000)
(5)
Quantity of Labor
Quantity of Labor
Labor Market
Individual Firm
Copyright McGraw-Hill/Irwin, 2005
Labor, Wages, and
Earnings
PURELY COMPETITIVE LABOR
MARKET EQUILIBRIUM
S
General Level of
Wages
Includes
Normal
Resource Profit
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
Wc
Marginal
NonCost (MRC) will
be
Labor
Costs to
constant$10
and Wequal
resource price
Labor
(the wage
D = MRP rate).
S = MRC
($10)
c
( mrp’s)
Key Terms
Costs
d = mrp
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(1000)
(5)
Quantity of Labor
Quantity of Labor
Labor Market
Individual Firm
Copyright McGraw-Hill/Irwin, 2005
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
• Single Buyer of a type of
labor
• The type of labor is
relatively immobile
“Wage Maker” Behavior
Key Terms
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Upward-Sloping Supply
Curve to Firm
Copyright McGraw-Hill/Irwin, 2005
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
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End
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Quantity of Labor
Copyright McGraw-Hill/Irwin, 2005
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
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End
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Qm
Quantity of Labor
Copyright McGraw-Hill/Irwin, 2005
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
The competitive
solution would
result in a higher
wage and greater
Employment.
Wc
Wm
MRP
Key Terms
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End
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Qm Qc
Quantity of Labor
Copyright McGraw-Hill/Irwin, 2005
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
Monopsonists maximize
The competitive
profits by hiring a smaller
solution would
number of workersresult
andin a higher
Wc
wage and greater
thereby paying a less-thanWm
employment
competitive wage rate.
MRP
Key Terms
Previous
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End
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S
Next
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Qm Qc
Quantity of Labor
Copyright McGraw-Hill/Irwin, 2005
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
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End
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S
Wage Rate (dollars)
Real Wages and
Productivity
Wc
D1
Next
Slide
Qc
Quantity of Labor
Copyright McGraw-Hill/Irwin, 2005
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
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End
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S
Wage Rate (dollars)
Real Wages and
Productivity
...by increasing
product demand
Wu
Wc
D2
D1
Next
Slide
Qc
Qu
Quantity of Labor
Copyright McGraw-Hill/Irwin, 2005
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
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End
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Wage Rate (dollars)
General Level of
Wages
Wu
Wc
D2
D1
Next
Slide
Qc
Qu
Quantity of Labor
Copyright McGraw-Hill/Irwin, 2005
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
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End
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Wage Rate (dollars)
General Level of
Wages
Wu
Wc
D2
D1
Next
Slide
Qc
Qu
Quantity of Labor
Copyright McGraw-Hill/Irwin, 2005
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
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End
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Wage Rate (dollars)
General Level of
Wages
S1
Wc
D
Next
Slide
Qc
Quantity of Labor
Copyright McGraw-Hill/Irwin, 2005
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
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End
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Wage Rate (dollars)
General Level of
Wages
...restrictive
S2
membership
S1 policies
Wu
Wc
D
Next
Slide
Qu
Qc
Quantity of Labor
Copyright McGraw-Hill/Irwin, 2005
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
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End
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Wage Rate (dollars)
General Level of
Wages
...restrictive
S2
membership
S1 policies
...restricting
labor supply of
the economy as
a whole
Wu
Wc
D
Next
Slide
Qu
Qc
Quantity of Labor
Copyright McGraw-Hill/Irwin, 2005
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
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End
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Wage Rate (dollars)
General Level of
Wages
Wu
Wc
...restrictive
S2
membership
S1 policies
...restricting
labor supply of
the economy as
a whole
…occupational
licensing
D
Next
Slide
Qu
Qc
Quantity of Labor
Copyright McGraw-Hill/Irwin, 2005
THREE UNION MODELS
Labor, Wages, and
Earnings
Inclusive or Industrial Model
...by organizing
S virtually all
workers and
thereby control
of the supply
curve for labor
causing…
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
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End
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15 - 22
Wage Rate (dollars)
General Level of
Wages
Wc
D
Next
Slide
Qc
Quantity of Labor
Copyright McGraw-Hill/Irwin, 2005
THREE UNION MODELS
Labor, Wages, and
Earnings
Inclusive or Industrial Model
...by organizing
S virtually all
workers and
thereby control
of the supply
curve for labor
causing…
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
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End
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Wage Rate (dollars)
General Level of
Wages
Wu
Wc
D
Next
Slide
Qu
Qc
Qe
Quantity of Labor
Copyright McGraw-Hill/Irwin, 2005
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
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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 McGraw-Hill/Irwin, 2005
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
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End
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Wage Rate (dollars)
Real Wages and
Productivity
MRC
S
…economic
theory
cannot
determine
the actual
outcome.
Wu
Wc
Wm
D
D=MRP
Next
Slide
Qu=Qm Qc
Quantity of Labor
Copyright McGraw-Hill/Irwin, 2005
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
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End
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Wage Rate (dollars)
Real Wages and
Productivity
MRC
S
…economic
theory
cannot
determine
the actual
outcome.
Wu
Wc
Wm
D
D=MRP
Next
Slide
DesirabilityQof=QBilateral
Monopoly
Q
u
m
c
Quantity of Labor
Copyright McGraw-Hill/Irwin, 2005
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
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End
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MINIMUM WAGE
CONTROVERSY
•Case Against
Minimum Wage
•Case For Minimum
Wage
•Evidence and
Conclusions
Copyright McGraw-Hill/Irwin, 2005
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
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WAGE DIFFERENTIALS
Marginal Revenue
Productivity
Noncompeting Groups
•Ability
•Education and Training
•Investment in Human
Capital
Copyright McGraw-Hill/Irwin, 2005
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
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WAGE DIFFERENTIALS
Compensating Differences
•Nonmonetary Differences
Market Imperfections
•Lack of Job Information
•Geographical Immobility
•Unions & Government
Restraints
•Discrimination
Copyright McGraw-Hill/Irwin, 2005
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
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PAY FOR PERFORMANCE
The Principal-Agent Problem
Incentive Pay Plan
• Piece Rates
• Commissions or Royalties
• Bonuses, Stock Options, &
Profit Sharing
• Efficiency Wages
Copyright McGraw-Hill/Irwin, 2005
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
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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 McGraw-Hill/Irwin, 2005
wage rate
nominal wage
real wage
purely competitive labor
market
monopsony
exclusive unionism
occupational licensing
inclusive unionism
Copyright McGraw-Hill/Irwin, Inc. 2005
bilateral monopoly
minimum wage
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 Profit
Minimum Wage
Controversy
Wage Differentials
Pay For Performance
Key Terms
Previous
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End
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Chapter 16
Next
Slide
Copyright McGraw-Hill/Irwin, 2005