Chapter 10:   Wage Determination

A.    General level of wages:

        1.    Generally, wages are higher in industrially advanced economies because the demand for labor is relatively large compared to supply. 

        2.    The demand for labor is high because labor in these economies is highly productive.

                a.    plentiful capital ( In the U.S., $90,000 of physical capital per worker)

                b.    access to abundant natural resources

                c.    advanced technology

                d.    labor quality ( health and vigor, but mostly training and education.

B.     Real wages and productivity

         1.    Because real income and real output are two ways of viewing the same thing, real income can only increase at the same rate as output per worker (productivity of labor).

         2.    See, Figure 14.1 and 14.2

C.    Determining the wage rate for a specific type of labor:

        1.    Hiring labor in a perfectly competitive labor market (wage taker).  Spend some time with Figure 14.3.

        2.    Monopsony model (a single employer)

                a.    Monopsony occurs where there is a single employer (buyer) of labor that is relatively immoble.

                        (1)    labor supply curve slopes upward because monopsony employer must offer higher wages to attract additional workers.        But, since employer must pay the higher wage to all previously employed workers, the marginal resource cost (MRC) will be greater than the wage rate for all units of labor other than the first.  Note that this is simply the flip-side of product demand for the uncompetitive seller where marginal revenue will be less than price.

                        (2)    Spend a few minutes with Figure 14.3 and Table 14.2.

                 b.    Compared to a competitive labor market, the monopsony employer maximizes its profit by hiring a smaller number of workers and paying a less-than-competitive wage.  Society gets a smaller output and workers get a wage rate which is less than their marginal revenue product.  Make sure you can explain this!!

D.    Three union models:  While unions have many goals, the most important is to increase member wages.

        1.    Demand-enhancement model:  for unions, the most desirable means of raising wages for members is to increase the demand for labor.  (Refer to chapter 14's discussion of factors that increase resource demand)

                a.    Increase product demand

                b.    Increase productivity of union workers

                c.    Alter the price of other inputs.  For example, unions staunchly support increasing the minimum wage when few memebers are directly affected)

        2.    Exclusive or craft union (control the supply of labor through restrictive membership policies)

        3.    Inclusive or industrial unions (By representing all employees in an industry, the union can threaten to deprive a firm of its entire labor supply through its right to strike.)

E.    Bilateral Monopoly Model

        1.    Occurs when a strong industrial union exists in a labor market that is monopsonistic rather than competitive.

        2.    If the monopoly power of the union is roughly equivalent to the monopsony power of the firm, the negotiated wage may be close to the competitive wage rate  See, Figure 14.8

F.    Minimum Wage  -  Please come to class prepared to argue, based on the text, either side of the minimum wage debate.

G.    Why do wages differ?  Again, it is simply a matter of demand and supply.  See, Figure 14.9

        1.    The strength of labor demand differs greatly among occupations due to differences in how much they contribute to the employer's revenue.        The marginal revenue product of star athletes and some entertainers id exceptionally high because millions of people are willing to pay high dollars to see them perform.  It's not how hard they work but how much revenue they earn for the employer.

2.    Supply side differences can be explained by:

                a.    Non-competing groups:  Differences in ability and education and training (investments in human capital) result in the labor force is segregated into groups that do not compete with each other.  In some groups, the supply is very small (surgeons) and in others the supply is large (clerical workers).

                b.    Compensating differences -  Workers in a particular non-competing group may be capable of performing several different jobs or occupations, but the jobs are very different.  Some are dirty, difficult or dangerous and the supply of workers is small.  In others the jobs are pleasant, relatively easy, and safe.  In these cases, the supply will by relatively great.  The wage differential between these jobs is paid to compensate for the non-pecuniary differences in jobs.

                b.    Market imperfections - Some persistent wage differentials cannot be explained in terms of non-competing groups or compensating differences.  These differences must then be the result of some market imperfections.

                        (1)    Lack of job information

                        (2)    Geographic immobility   

                        (3)    Unions and government restraint

                        (4)    Discrimination

                d.      Note:    The summary of this section which begins at the bottom of page 286 is a good study aid.  It does a good job of pulling this all together.

Assignment:

   1.    Explain the long-run relationship between real hourly earnings and productivity.

    2.    Explain why Marginal Resource Cost (MRC) exceeds the wage rate in the case of a monopsonistic employer.

    3.    Explain and illustrate with your own examples "compensating differences" and "non-competing groups.