Econ Chapter 28

The case against the minimum wage

an above equilibrium wage will push employers back up their labor demand curves, causing them to hire fewer workers

Craft Union/ Exclusive unionism

By excluding workers from unions and therefore from the labor supply, craft unions succeed in elevating wage rates

Nominal Wage

The amount of money received per hour, day, or year

Why does more education= more income

(1) There are fewer such workers, (2) More education= more productive

Inclusive or Industrial Union Model

An industrial union that includes all workers can put firms under great pressure to agree to its wage demand Results in a surplus of labor!!!!????

Education and training

Another source of wage differentials has to do with differing amounts of investment in human capital

Secular Growth of Real Wages

As a result of the productivity-increasing factors above, labor demand has increased more rapidly than labor supply, resulting in long run increases in wage rates and employment

Wage differentials

Caused by differences in marginal revenue productivity, noncompeting groups, non monetary differences, and market imperfections

Equilibrium Wage and Employment

To maximize profit, the monopsonist will employ the quantity of labor where MRC= MRP and will drive down to the supply curve

Occupational Licensing

A group of workers in a given occupation pressure federal, state, or municipal government to pass a law that some occupational groups can practice their trade only if they meet certain requirements

The case for minimum wage

A higher minimum wage may produce more jobs by eliminating the motive for restricting employment May increase labor productivity

Monopsony

A market in which a single employer of labor has substantial buying (hiring) power There is only 1 buyer of a particular type of labor This labor is relatively immobile, either geographically or because workers would have to acquire new skills The firm is a "wage maker" because the wage rate it must pay varies directly with the number of workers it employs

Profit-sharing plans

Allocate a percentage of a firm's profit to its employees

Stock options

Allow workers to buy shares of their employers stock at a fixed, lower price with the stock price rises

Investments in human capital

An expenditure in education or training that improves the skills and therefore productivity of workers

Ability

Because the supply of these particular types of labor is very small in relation to labor demand, their wages are high The members of these and similar groups do not compete with one another or with other skilled or semiskilled workers

Piece Rates

Compensation paid according to the number of units of output a worker produces

Labor Earnings

Determined by multiplying the number of hours worked by the hourly wage rate

Efficiency wages

Employers will enjoy a greater effort from their workers by paying them above-average wage rates

Total or market labor demand curve

Found by summing the labor demand curves of the individual firms

How may the unemployment effect be reduced?

Growth and elasticity

Competitive v. Monopsonist

In a competitive labor market, the level of employment would be greater and the wage would be higher

Access to abundant natural resources

In advanced economies, natural resources tend to be abundant in relation to the size of the labor force

The demand for labor in the US is large because

Labor in those countries are highly productive and labor demand is large relative to labor supply

Purely competitive labor markets

Many firms compete with one another in hiring a specific type of labor Each of numerous workers with identical skills supplies that type of labor Individual firms and individual workers are "wage takers" since neither can exert any control over the market wage rate

Compensating differences

Must be paid to compensate for non monetary differences in various jobs Play an important role in allocating society's scare resouces

Exclusive or Craft union Model

One way in which unions can boost wage rates is to reduce the supply of labor These unions have supported legislation that has (1) restricted immigration, (2) reduced child labor, (3) encouraged compulsory retirement, (4) enforced a shorter work week

Bonuses

Payments in addition to one's salary that are based on some factor

The supply curve for the perfectly elastic firm is

Perfectly elastic

Why is labor in the US so productive

Plentiful capital, access to abundant natural resources, advanced technology, labor quality

Principal Agent problem

Possible differences in the interests of corporate stockholders and the executives they hire This also occurs with workers and the firm

Minimum Wage

Purpose is to provide a "wage floor" that will help less skilled workers earn enough to income to escape poverty

Demand Enhancement Model

Raise wages by increasing demand for labor To increase labor demand, the union may alter one or more of the determinants of demand

The effect of wage-raising actions achieved by both exclusive and inclusive unions

Reduced employment

The supply curve for each type of labor

Slopes upward, indicating that employers must pay more to obtain more labor

Market Imperfections

Some persistent differentials result from various market imperfections that impede workers from moving from lower paying jobs to higher paying jobs These include lack of job information, geographic immobility, unions and gov. restraints, discrimination

When the price of a resource is given to a competitive firm

The MRC= the wage rate

Advanced technology

The equipment is technologically superior to other equipment

Labor Quality

The health, vigor, education, and training of workers in the US are generally superior to those in developing nations

What determines the equilibrium in a purely competitive labor market

The intersection of supply and demand

Elasticity of labor supply

The less elastic the labor supply, the greater will be the wage increase. The more elastic the labor supply, the greater will be the employment increase

Growth

The normal growth of the economy increases the demand for most kinds of labor over time and might offset the unemployment effect created by unions

Indeterminate outcome of bilateral monopoly

The outcome is logically indeterminate However, the outcome could be desirable because it may settle near competitive wages and employment

Wage Rate

The price paid per unit of labor services

Real Wage

The quantity of goods or services a worker can obtain with nominal wages Reveal the "purchasing power" of nominal wages Depends on your nomial wage and prices of the goods and services you purchase

Elasticity

The size of the unemployment effect resulting from a union induced wage increase depends on the elasticity of demand for labor The more inelastic the demand, the smaller is the amount of the unemployment that accompanies a given wage-rate increase

Marginal Revenue Productivity

The strength of labor demand differs greatly among occupations due to differences in how much various occupational groups contribute to their employers revenue, this depends on the workers productivity and the strength of the demand for the products they help product

The supply curve of the monopsony firm

The supply curve is up-sloping, indicating that a firm must pay a higher wage rate to attract more workers The supply curve= the average cost of labor curve for the firm

Bilateral monopoly

The union is a monopolistic "seller" of labor that controls labor supply and can influence wage rates, but it faces a monopolistic "buyer" of labor that can also affect wages by affecting its employment

Commission or royalties

Tie compensation to the value of sales

Incentive pay plan

Tie worker compensation more closely to worker output or performance

MRC of monopsony firm

When a monopsonist pays a higher price to attract an additional worker, it must pay that higher wage to all the workers it is currently employing at a lower wage This means that the cost of an extra worker- the MRC, is the sum of that workers wage rate and the amount necessary to bring the wage rate of al current workers up to the new wage rate

Relationship between real wages and productivity

When workers produce more real output per hour, more real income is available to distribute to them for each hour worked, HOWEVER, since other suppliers also share this income, this is not always the case

Where will each individual firm find it profitable to hire?

Where MRP=MRC

Noncompeting groups

Workers are not homogeneous, and differ in mental and physical capacities and in their education and training The labor force is made up of many noncompeting groups of workers, each representing several occupations for which the members of a particular group qualify

Plentiful Capital

Workers in advanced economies have access to large amounts of physical capital equipment

To determine a firms total revenue from employing a particular number of labor units

sum the MRPs of those units