Chapter 26-Wage Determination

Presentation 1

Labor

• Broadly defined as: • 1. Blue and white collar workers • 2. Professionals- doctors, lawyers • 3. Owners of small businesses

Wages

• Hourly pay, annual salaries, bonuses, commissions, royalties, and fringe benefits (vacations, health insurance, pensions) • Wage Rate Price paid per hour of service

Nominal v Real Wage

• Nominal Wage- the amount of money received per hour, day, or year • Real Wage- the quantity of goods and services a worker can obtain with nominal wages-- the “purchasing power” of nominal wages

Real Wages Cont’d

• Real wages depend on your nominal wage and the price of goods/services you purchase • Ex- you receive a 5% raise in nominal wages but the price of goods goes up 3% • *** your real wages increase by 2%

Labor Wages and Earnings

GLOBAL PERSPECTIVE

Hourly Wages of Production Workers Selected Nations

Hourly Pay in U.S. Dollars, 2004 0 5 10 15 20 25 30 35 Denmark Germany Switzerland Sweden United Kingdom France United States Australia Japan Canada Italy Korea Taiwan Mexico

2.50

5.97

11.52

24.71

23.89

23.17

23.09

21.90

21.42

20.48

33.75

32.53

30.26

28.42

Source: U.S. Bureau of Labor Statistics, 2006

Reasons for High Productivity

• 1. large amounts of physical capital • 2. access to abundant natural resources • 3. advanced technology • 4. labor quality-better health, education and training • 5. other factors such as work environment and flexible management

Real Wages and Productivity

• Over long periods of time, productivity and real wages tend to rise together

Purely Competitive Labor Market

• 1. numerous firms compete with one another in hiring a specific type of labor • 2. many workers with identical skills supplying the same type of labor • 3. individual firms and workers are “wage takers”

Market Demand for Labor

• To find the total or market demand curve for a particular labor service, sum horizontally the labor demand curves (the marginal revenue product curves) of the individual firms

Labor Market S ($10) W

C

0 D=MRP (∑ mrps)

Q C

(1000) Quantity of Labor

Market Supply of Labor

• The supply curve slopes upward, indicating the employers as a group must pay higher wage rates to obtain more workers • The higher wages are used to attract workers away from other industries and locales

Labor Market Equilibrium

• The intersection of the market labor demand curve and the market supply curve determines the equilibrium wage rate and level of employment

S ($10) W

C

0 D=MRP (∑ mrps)

Q C

(1000) Quantity of Labor

Individual Firm

• The individual firm in a perfectly competitive firm maximizes profit by hiring workers to the point where Wage rate = MRP

($10) W

C

s=MRC 0

d=mrp q C

(5)

c

Quantity of Labor

Monopsony

A single employer of labor has substantial buying (hiring power) with the following characteristics: 1. Only a single buyer of a particular good 2. Labor is immobile (workers would have to move or acquire new skills) 3. The firm is a wage maker **monopsony power can vary

Monopsony Model

Monopsonistic Labor Market

MRC

S

W 14.1

W c W m b c a

MRP 0

Q m Q c

Quantity of Labor

Examples of Monopsony Power

Examples of Monopsonies

• Some markets such as: • nurses: one hospital • professional athletes: drafts • public school teachers: only one school

MRC Higher than Wage Rate

• When a monopsonist pays a higher wage to attract new workers, it must pay more to current workers as well • Ex- one worker can be hired @ $6 and a second worker can be hired for $7 • Therefore the Marginal Resource Cost of the second worker is $8…the $7 plus the $1 raise to worker #1