Wage Determination
What are the three types of union models?
1) demand enhancement model 2) exclusive or craft union model 3) inclusive of industrial union model
what are the three ways a union can raise competitive wage rates?
1) increasing derived demand for labor 2) restricting supply of labor through exclusive unionism 3) directly enforcing an above-equilibrium wage rate through exclusive unionism
what determines the employment and wage of bilateral monopoly?
bargaining power of union and employer
why do industrial countries have higher wages?
better productivity due to: o Plentiful capital- 118,000 $ per worker o Access to abundant natural resources- in relation to labor force o Advanced technology- level of production technology high - work methods constantly being improved o Labor quality- health, vigor, education, training of works superior and therefore more sufficient o Other factors - the efficiency and flexibility of management, business, social and political environment that emphasizes productivity, the vast size of the domestic market, which enables firms to engage in mass production
explain demand enhancement model
can increase demand for labor by increasing demand for goods or services they help produce • ex. Political lobbying to increase demand or increases gov spending on education construction etc, tariffs and quotas, trade restrictions • altering price of other outputs o increase min wage because low-wage nonunion labor will discourage substituting such workers from union workers • support policies to reduce or hold down price of complementary resources
what is the incentive pay plan?
compensation structure that ties workers pay directly to performance ex piece rates bonuses stock options commissions profit sharing
wage differentials
differences in average annual salaries for different occupations • Can arise on either supply or demand side of labor markets • 4 models!
what 2 factors separates not competing groups?
education and training, and ability
what are the arguments for and against excessive ceo pay?
for: decisions made by ceo affect productivity of every employee- therefore MRP is enormous and high wages, or "tournament pay" to find best managers- gives good incentives against: reject "tournament pay" ideal- e=believes overpayments at expense of firm's stockholders, and pay bears little relationship to MRP
the supply of labor slopes upward in purely competitive labor market because...
higher wages needed to attract workers away from other labor markets, household activities, and leisure.
what are market imperfections
impede workers from moving from lower paying jobs to higher paying jobs 1. lack of job info 2. geographic immobility 3. unions and government restraints 4. discrimination
how does discrimination impact markets?
lower wages being paid to minority workers and women than white males doing similar/identical work
what is the supply curve faced by individual firm for labor in perfect competition?
market wage rate establishes horizontal labor supply curve which is equal to MRC because MRC is constant so wage=MRC=supply curve
What is a monopsony model? what are the characteristics?
o Single buyer of a particular type of labor o Workers have few employment options, either geographically immobile or would have to acquire new skills o The firm is "wage maker" because wage rate it must pay varies directly with number of workers it emplys • Various degrees of monopsony power = pure monopsony is single employer ex. Colorado ski resort geographic isolation • Some monopsony three or four firms
what is human capital?
personal stock of knowledge, know-how and skills that enable a person to be productive and earn more income ex. education
what are the negative side effects of performance play plans?
rapid production of piece rates- poor product quality potential issues worker safety - commissions may cause questionable behavior- private lawsuits/government action - bonuses may disrupt cooperation -profit sharing - "free ride" problem - stock options - unscrupulous executives downside of above-market wages- fewer opportunities to hire new workers, suffer loss creative energy
the firm's labor demand curve slopeds downward for competitive firm because..
the law of diminishing returns applies
What is the purpose of pay for performance plans
to resolve principal agent problem and make sure paid employees also want firm to thrive and survive- better than monitoring workers- prevents them from shirking efficiency wages- employers will enjoy greater effort from workers by paying above-equilibrium wage rate- above equilibrium wage rate- worker morale, higher quality workers attracted, lower turnover, more experienced work force etc
what is the labor supply curve doing for a firm in monopsony model and why?
upsloping,• If firm large in relation to size of labor will have to pay a higher wage rate to attract labor away from other alternatives • Pure monopsony- the labor supply curve for the firma and the total labor supply curve for labor market are identical • This curve also monopsonists average cost of labor curve
what are compensating differences?
wage differentials that must be paid to compensate for nonmonetary differences in jobs such as risks or rigid work hours etc
purely competitive market supply of labor
• Assume no union present, and workers individually compete • Slopes upward, indicating that employers as a group must pay higher wage rates to obtain workers, bid them away from alternative job opportunities available to them • More workers enticed to offer their labor services in market with higher wages.
purely competitive market demand for labor
• Firms need not be in same industry- may only use same resources • To find total market demand sum horizontally the labor demand cures= the marginal product curves of individual firms
evidence and conclusions from minimum wage controversy
• Firms will not hire workers who cost more per hour than the value of their hourly output • Will only cause unemployment in labor markets were the minimum wage is higher than equilibrium wage • Unemployment tends to fall on low skilled workers with low productivity! • Overall effect unknown- not super strong antipoverty tool! But has strong politic support
What is a purely competitive labor market - 3 factors
• Numerous firms compete with one another in hiring a specific type of labor • Each of many qualified workers with identical skills supplies that type of labor • Individual firms and individual workers are "wage takers" since neither can exert any control over market wage rate
purpose of minimum wage
• Purpose to provide a wage floor that will help less skilled workers earn enough income to escape poverty
what is the role of productivity in determining wages?
• Role of productivity - the greater the productivity the greater demand for it.. if total supply fixed, the greater the demand the high the avg. level real wages
case against minimum wage reasons
• Simply cause employers to hire fewer workers - better off employed at lower than unemployed, may force some firms out of business • Poorly targeted- benefits accrues to workers, many teenagers not in impoverished households
what are the effects of a monopsony on equilibrium wage and employment?
• To max profit output will be MRC= MRP but price will be on supply curve so wage will not equal MRP • The monopsonist maximizes profit by hiring smaller number of workers at less than competitive wage rate! • Society obtains smaller output
give examples of monopsony power
• Uncommon in the US - unions have sprung up to counteract that power by forcing firms to negotiate wages • Ex. Professional athletes, nurses, public school teachers • Ex. Professional sports leagues- pay of first year players "player drafts and lower salaries!
why is a bilateral monopoly model desirable?
• Wage and employment outcomes economically desirable because tow forces cancel each other out yielding competitive or near competitive results • May be closer to competitive levels than if monopoly existed on only one side of market • Wage and outcomes determined by collective bargaining!
define wage rate
• Wage rate = price paid per unit of labor services - will use it as all benefits and payments converted to hourly basis • Labor earnings is wage rate x hours worked o Wages take form of hourly pay, annual salaries, commissions, benefits, bonuses, royalties, insurance, pensions, vacations
case for minimum wage
• World not really competitive labor market- monopsony powers • Higher minimum wage rate can eliminate motive for monopsony to restrict employment • Higher wage rate might prompt firms to find more productive tasks for low-paid workers • May reduce labor turnover, fewer trainees, average production of workers will rise
what are noncompeting groups?
- differ in mental and physical capacities, education training • Noncompeting groups of workers- when one group does not qualify for occupations of other groups
define marginal revenue productivity
- strength of labor demand (how far right it is) differences in how much various occupational groups contribute to revenue of respective employers - depends on productivity and demand product • Marginal revenue productivity - when this is high for individual demand leads to extremely high salaries - ex sports players
reasons for wage differentials
1. marginal revenue productivity of various groups of workers, 2. noncompeting groups arise through differences in capacities and eduction of workers 3. compensating wage differences must be paid to offset nonmonetary differences in jobs such as risk 4) market imperfections in the form of lack of info, geographic imobility, unoin and government restraints, and discrimination
explain exclusive or craft union model
2) exclusive or craft union model- boost wage rates by reducing supply of labor • support legislation that 1) restricts permanent immigration, 2)reduced child labor, 3) encouraged compulsory retirement, 4) enforced a shorter workweek • technologies to restrict number of works who can join ex. Craft unions- frequently force employers to only hire union members, giving them compete control of labor supply • exclusive unionism restrictive membership policies- ex. High initiation fees, limits on numbers, long apprenticeships - artificially restricted labor supply to result in higher wage rates o also nationa leducaiotn associaotn, medical , bar association • occupation licensing - the laws of state or local govs that require a worker satisfy certain specified requirements and obtain a license from a licensing board before engaging in a particular occupation o ex. Phsyicans cosmetologists, pest control, o education, tests, personal characterisitcs, experience o expressed purpose to protect consumers from incompetitent practitioners but limits supply, higher wages!
explain bilateral monopoly model
Bilateral monopoly model - combination of monopsony model labor market and inclusive unionism model - single seller, single buyer! • Ex. Steel, automobiles, construction equipment, prof sports, aircrafts • Indeterminate outcome of bilateral monopoly - employer will seek below-competitive equilibrium rate, union will press for above o Outcome is logically indeterminate will lie somewhere between the two
where is the mrc line in a monopsony model and why?
MRC higher than wage rate- must pay higher wage rate not only to additional worker but to all workers • Cost of an extra worker - MRC is sum of worker's wage rate and amount necessary to bring wage rate of all current workers up to that level • So MRC curve about and to left of supply curve - MRC exceeds wage rate
what is the relationship between long-run average real wage growth and productivity?
Real wages and productivity - close long-run relationship between output er hour work and hourly compensation • Real income per worker can increase only at about same rate as output per worker • In short run don't always rise together, in long-run tend to! Long-run trend of real wages • Labor force has grown but productivity increasing factors increases in labor demand outstripped increases in supply= result is long-run secular increase in wage rates and employment
effects of unions
Wage increases and job loss - • Union workers 15% wage advantage over non union workers • Reduces employment in unionized firms! - causes issues with support for unions
what is the principal agent problem?
a conflict of interest that occurs when workers or managers (agents) pursue their own objectives to the detriment of the principals' (stockholders') objectives
graph and describe what happens in long run equilibrium for a firm hiring in a purely competitive labor market ?
• In long run-equilibrium for firm selling in purely comp product market and hiring in pure comp labor market - total cost= total revenue and earn only normal profit
where is labor market equilibrium?
• Intersection of supply and demand curve- wage rate and level employment in purely competitive market • The supply labor faced by individual firm perfectly elastic- and wage rate is given, and higher up to where MRP= MRC • To determine firm's total revenue form employing a particular number of labor units sum MRP's of those units
explain inclusive or industrial union model
• Most unions seek to organize all available workers - esp industrial unions o All available unskilled, skilled, semiskilled to put firms under great pressure- legal right to strike, deprive of entire labor supply o Difficult in short run for nonunion firms to emerge • Inclusive unionism- creates perfectly elastic labor supply until hits normal supply curve creates higher wages, lower employment • In pure competitive labor market w/out union surplus unemployed workers would create lower wages
what is the difference between nominal wage and real wage?
• Nominal wage- amount of money received per hour, day, or year • Real wage- quantity of goods and service a worker can obtain with nominal wages- purchasing power o Real wage depends on nominal wage and price of goods and services you purchase