Chapter 15: Wage Determination

rising level of wages and unemployment in advanced economies like the U.S

demand has shifted greatly, while supply has only increased a bit. may seem counterintuitive. labor demand has increased more rapidly than labor supply. -increase in labor demand caused primarily by increases in labor productivity greater the productivity of labor, the higher demand for it

characteristics of monopsony or an imperfectly competitive labor market

monopsony: a market with a single buyer monopsonistic labor market: one employer of a particular type of labor services Ex: lee memorial health system A. workers with a specific skill are identical B. downward sloping market demand curve (MRPl curve) for a specific type of labor C. Labor supply curve facing the firm is upward sloping 1. firm's labor supply curve is the market supply curve for a specific type of labor 2. employer is a WAGE MAKER because it hired a large fraction of the total supply for a particular type of labor FIRM HAS MARKET POWER IN HIRING 3. economic significant of a monosponist facing an upward sloping labor curve: When a monopsonist pays a higher wage to attract an additional worker, it must pay that higher wage to all of the workers it is currently employing at a lower wage (no wage discrimination,) therefore marginal labor cost curve must lie above the labor supply curve. D. barriers to entry into, and exit from the labor market 1. workers are relatively immobile therefore they do not have many other alternatives for comparable employment

bilateral monopoly model

single seller, single buyer -inclusive union goes up against monopsonistic empoyer

in a purely competitive labor market...

the equilibrium wage is deterred by the demand and supply of labor (wage takers) (numerous competing firms) (each worker has identical skills)

real wage

the nominal wage adjusted for changes in the price level, reflects the purchasing power of nominal wages (pay check wage, the amount of money received plus benefits.)

labor, wages, and earnings

wages: price that employers pay for labor refers to the price of labor services

case against the minimum wage

a. assumes a competitive labor market for the covered workers b. above equilibrium minimum wage creates a surplus of workers c. in the short run the minimum wage -reduces employement -may increase unemployment for covered workers

case for the minimum wage

a. assumes a monopsonist labor market for covered workers b. wages and employment of covered workers increase if the minimum wage is set "correctly" -if minimum wage is set incorrectly, then employment of covered workers is reduced c. consumers lose because minimum wage increases the cost of production and product prices d. firms lose because higher product prices reduce sales e. employers may lose some of their monospony profits f. increasing min wage may increase productivity and reduce labor turnover

purely competitive labor market

a. downward sloping market demand for labor curve (for a specific occupation) due to diminishing returns b. upward sloping market supply of labor because higher wages MUST be paid to bid workers away from other opportunities, including other occupations, different geographic locations, leisure activities, and other variables

profit maximization in a monopsonistic labor market

a. employer's decision rule to determine th optimal amount of labor to hire: MRPL=MLC

sources of barriers to entry and exist for a monopsonistic labor market

a. financial constraints b. geographic constraints c. family constraints d. human captica constraints

inclusive (industrial) union model

1. organize all workers-- unskilled, semi-skilled, and skilled-- in an industry United Auto workers, United mine workers, united steelworkers of america 2. THROUGH COLLECTIVE BARGAINING ENCOURAGE EMPLOYERS, UNDER THREAT OF STRIKE, TO PAY ABOVE MINIMUM WAGE RATES 3. Union-induced wage rates REDUCES EMPLOyment AND INCREASED UNEMPLOYMENT

exclusive (craft) union model

1. organize skilled workers like plumbers, carpenters, electricians, masons, etc 2. DECREASE THE SUPPLY OF THE UNION LABOR by using restrictive membership policies a. long apprenticeships b. high fees to join the union c. limit the number of new members 3. union induced wage increases reduction in employment and increases unemployment

cost of the minimum wage from society's viewpoint

1. some minimum wage workers benefit, some workers lose bc they are prices out of the labor market 2. consumers lose because minimum wage increases the cost of production and product prices 3. firms lose because higher product prices reduces sales 4. minimum wage in not an effective program to reduce household poverty a. federal poverty line is based on size of household and annual income b. minimum wage fails to fulfill its objective of insuring a "minimum standard of living" c. dilemma: raising the minimum wage so a few heads of household may achieve a "minimum standard of living: might cause increasing unemployment of low-wage teenage workers

sources of increases in labor productivity

1. technological advances 2. increases in human capital, the skills and knowledge that people acquire from education and training. 3. increases in capital per worker 5. institutional factors (social, political, legal factors) a. entrepreneurship and risk taking b. work ethic. materialism c. large markets promote economies of mass production d. system of property rights and freedom e. free trade promotes specialization

minimum wage

A. Fair Labor Standards Act (1938) 1. established a national WAGE FLOOR for covered nonexempt workers 2. minimum wage in 1938 was .25 an hour 3. current federal minimum wage is 7.25 an hour B. states may establish their own miminum wage 1. where federal and state laws have different minimum wage rates, the higher standard applied 2. current florida minimum wage= 8.05 an hour c. wage floor: effective minimum wage must be set above the market equilibrium wage rate for covered nonexempt workers d. the intended purpose of the minimum wage is the "maintenance of ht minimum standard of living necessary for health, efficiency, and general well-being of workers."

economic implications of a monopsonistic labor market

a. from the worker's point of view: monopsonist exerts its market power in the labor market by paying a wage rate (W) that is less than the marginal revenue product of labor (MRPl) 1. W<MRPl 2. Workers are paid less than they are worth to the firms b. from the firm's point of view Monopsonist pays a LOWER wage rate and hires LESS workers compared to a purely competitive firm c. from society's point of view the inefficiency that results from monospony is that the firm produces LESS output compared to pure competition

purely competitive labor market characteristics

a. large number of buyers of labor services (firms,) large number of sellers of labor services b. workers with a specific skill are all identical and all jobs are equally attractive to workers c. intersection of the downward sloping market demand curve and upward sloping market supply curve of a specific type of labor determines the market wage rate d. firms and workers have no market power or no control over the wage rate in the labor market

factors that cause the market supply of labor to shift

a. natural population growth and population decline (in america, there are more births than deaths, so eventually, people enter the labor force when they come of age, and increase the supply of labor) b. life expectancy c. women in the labor force participation rate i. discrimination ii. technological changes and capital used for production in home d. immigration and emigrations e. preferences for work vs. leisure

pay for performance

a. principal-agent problem 1. interests of the agents (employee) are different from the interests of the principal (employer) 2. arises in labor markets because workers may provide less than the expected work effort b. solutions to the principal agent problem 1. monitor workers 2. incentive pay plans a. piece rates b. commissions c. bonuses d. stock options e. profit-sharing plan f. efficiency wages

wage differentials

a. unrealistic: if all workers were identical, then all jobs would be equally attractive to workers, and labor markets are purely competitive, then all workers would receive the same wage rate. b. reality: reasons why wage differentials exist between different occupations and different individuals in the same occupation 1. differences in marginal revenue productivity a. for a given supply of labor curve, low MRPl-curve vs high MRPl curve b. for a given demand for labor curve, low supply curve vs. high supply curve 2. non-competing groups a. many workers do not compete with each other for employment, professor and professional athletes b. differences in innate ability or physical attributes c. differences in human capital 3. compensating wage differences a. wage differentials that compensate for differences in working conditions or non-monetary aspects of a job b. sources of compensating wage differentials i. job locations: amenities, weather, etc ii. time of day: night shift, day shift iii. job risk: safe job, risky job iv. job status: degree of social approval 4. labor market imperfections hinders workers from moving a lower-paying job to a higher-paying job a. lack of job information b. geographic mobility c. unions d. governmental licensing e. pension plans, health insurance benefits, seniority rights f. discrimination

unions

goal: to get higher wages and benefits and better working conditions for its members