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 Previous Slide End Show 15 - 1 Next Slide 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 Previous Slide End Show 15 - 2 Next Slide 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 Previous Slide End Show 15 - 3 Next Slide 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 Previous Slide End Show 15 - 4 Next Slide 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 Previous Slide End Show 15 - 5 Next Slide 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 Previous Slide End Show 15 - 6 Market Demand for Labor Next Slide 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 Previous Slide End Show 15 - 7 Next Slide (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 Previous Slide End Show 15 - 8 Next Slide (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 Previous Slide End Show 15 - 9 Next Slide 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 Previous Slide End Show 15 - 10 Next Slide 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 Previous Slide End Show 15 - 11 Next Slide 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 Previous Slide End Show 15 - 12 Next Slide 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 Slide End Show 15 - 13 S Next Slide 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 Slide End Show 15 - 14 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 Slide End Show 15 - 15 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 Slide End Show 15 - 16 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 Slide End Show 15 - 17 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 Slide End Show 15 - 18 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 Slide End Show 15 - 19 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 Slide End Show 15 - 20 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 Slide End Show 15 - 21 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 Slide End Show 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 Slide End Show 15 - 23 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 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 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 Slide End Show 15 - 25 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 Slide End Show 15 - 26 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 Previous Slide End Show 15 - 27 Next Slide 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 Previous Slide End Show 15 - 28 Next Slide 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 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 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 Previous Slide End Show 15 - 30 Next Slide 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 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 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 Slide End Show 15 - 33 Chapter 16 Next Slide Copyright McGraw-Hill/Irwin, 2005