MICRO CH 15 - Wage Determination
Bilateral Monopoly
A market in which there is a single seller (monopoly) and a single buyer (monopsony)
Monopsony
A market structure in which there is only a single buyer of a good, service, or resource
Purely Competitive Labor Market
A resource market in which many firms compete with one another in hiring a specific kind of labor, numerous equally qualified workers supply that labor, and no one controls the wage rate
How do unions increase wage rates by pursuing the demand-enhancement model, the craft union model, or the industrial union model?
(a) Increasing the derived demand for labor (b) Restricting the supply of labor through exclusive unionism (c) Directly enforcing an above-equilibrium wage rte through inclusive unionism
Monopsony Model
- Employer has buying power Characteristics - Single buyer - Labor immobile - Firm "wage maker" b/c the wage rate it must pay varies directly with the number of workers it employs - Firm labor supply is upward sloping - MRC higher than wage rate - Equilibrium (MRP = MRC)
Craft Union Model - Union Model #2
- Exclusive unionism (Craft Unions) Labor with specific skill sets - Masons - Plumbers - Carpenters Limit the supply of labor - Apprenticeships - Licenses - Fees
Monopsony Power - how to maximize profits?
- Hiring fewer workers than a firm in a purely competitive labor market - Paying a lower wage than a firm in a purely competitive labor market.
Demand Enhancement Model - Union Model #1
- Increasing product demand - Increases labor demand - Derived Demand
Horizontal Supply Curve
- Individual firms and workers are wage takers . - Since neither can exert any control over the market wage rate.
Market Imperfections
- Lack of job information - Geographic immobility - Unions and government restraints - Discrimination
Market supply of labor
- Many qualified workers with identical skills - Upward sloping - Sum of all the laborers who are willing and able to work
Bilateral Monopoly Model
- Monopsony and inclusive unionism - Single buyer and single seller - Not uncommon - Indeterminate outcome - Desirable
Market demand for labor
- Numerous firms compete with one another - Sum of firms demand curves (MRP)
U.S. labor is highly productive due to what?
- Plentiful capital - Access to abundant natural resources - Advanced technology - Labor quality - Other factors
Union Models - Successful? Consequences?
- Successful: Wages 15% higher on average - Consequences: Higher unemployment Restricted ability to demand higher wages.
Marginal Revenue Productivity (MRP)
- The change in a firm's total revenue when it employs 1 additional unit of a resource (the quantity of all other resources employed remaining constant) - Equal to the change in total revenue divided by the change in the quantity of resources employed SAME AS MARGINAL REVENUE PRODUCT
How can a monopsony reduce wages below competitive levels?
- The marginal resource cost curve lies above the resource supply curve b/c the monopsonist must bid up the wage rate to hire extra workers and must pay that higher wage rate to all workers - The monopsonist hires fewer workers than are hired under competitive conditions, pays less-than-competitive wage rates (has lower labor costs), and thus obtains greater profit
Inclusive Unionism
- The policy pursued by industrial unions - In which a union attempts to include every worker in a given industry so as to be able to restrict the the entire industry's labor supply and thereby raise wages
Exclusive Unionism
- The policy pursued by many craft unions, - In which a union first gets employees to agree to hire only union workers and then excludes many workers from joining the union so as to restrict the supply of labor and drive up wages
Wage Rate
- The price paid for the use or services of labor per unit of time - Direct pay plus fringe benefits - Nominal wage, real wage, general level of wages
ID the types, benefits, and costs of "pay-for-performance" plans
- The principal-agent problem arises when workers provide less than expected effort - Firms may combat this by monitoring workers or by creating incentive pay schemes that link worker compensation to performance
Are CEO's Overpaid?
- U.S. CEO salaries relatively high - Good decisions enhance productivity - Limited supply, high MRP - Incentive to raise productivity at all levels - High salary bias by board members - Unsettled issue
Noncompeting Groups
Collections o workers who do not compete with each other for employment b/c the skill and training of the workers in one group are substantially different from those of the workers in other groups
How are wage rates and employment levels determined in competitive labor markets
Competitive labor market - the equilibrium wage rate and level of employment are determined at the intersection of the labor supply curve and labor demand curve Individual firm - the market wage establishes a horizontal labor supply curve, meaning that the wage rate equals the firm's constant marginal resource cost; the firm hires workers to the point where MRP = MRC
Industrial Union Model - Union Model #3
Inclusive unionism
Open Shop
Is one in which the employer may hire either union or nonunion workers
Labor Market Equilibrium
MRP = MRC Rule
Union Shop
Permits the employer to hire nonunion workers but requires that these workers join the union within a certain period
Closed Shop
Requires that a worker be a member of the union (or become one) before being hired by the firm
Agency Shop
Shop allows nonunion workers but requires them to either pay union dues or donate an equal amount to charity
Wage Differentials
The difference between the wage received by one worker or group of workers and that received by another worker or group of workers
Human Capital
The knowledge and skills that make a person productive
Occupational Licsensing
The laws of state or local governments that require that a worker satisfy certain specified requirements and obtain a license from a licensing board before engaging in a particular occupation
Minimum Wage
The lowest wage that employers may legally pay for an hour of work