Labor Wages

and Earnings
Real Wages and
Productivity
Purely
Competitive
Labor Market
Monopsony
Model
26
Three Union
Models
Bilateral
Monopoly
Minimum Wage
Wage

Wage
Differentials
Pay for
Performance
Last Word

Key Terms

End Show
Determination
26-1 Copyright 2008 The McGraw-Hill Companies
 Chapter Objectives
• Why Labor Productivity and Real
Labor Wages
and Earnings Hourly Compensation Track So
Real Wages and
Productivity
Closely Over Time
Purely
Competitive
• How Wage Rates and Employment
Labor Market
Monopsony
Levels are Determined in
Model
Three Union
Competitive Labor Markets
Models • How Monopsony Can Reduce
Bilateral
Monopoly Wages Below Competitive Levels
Minimum Wage
Wage • How Unions Can Increase Wage
Differentials
Pay for Rates
Performance
Last Word • The Major Causes of Wage
Key Terms
Differentials
End Show
• The Types, Benefits, and Costs of
“Pay-for-Performance” Plans
26-2 Copyright 2008 The McGraw-Hill Companies
 Labor Wages and Earnings
Labor Wages
• Wage Rate
and Earnings
Real Wages and
• Nominal Wage
Productivity
Purely
Competitive
• Real Wage
Labor Market
Monopsony
• General Level of Wages
Model
Three Union
Models
• Role of Productivity
Bilateral
Monopoly
– Plentiful Capital
Minimum Wage
Wage – Access to Abundant Natural
Differentials
Pay for
Performance
Resources
Last Word – Advanced Technology
Key Terms – Labor Quality
End Show – Other Factors
26-3 Copyright 2008 The McGraw-Hill Companies
 Labor Wages and Earnings
GLOBAL PERSPECTIVE
Labor Wages
and Earnings Hourly Wages of Production Workers
Real Wages and
Productivity Selected Nations
Purely Hourly Pay in U.S. Dollars, 2004
Competitive
0 5 10 15 20 25 30 35
Labor Market
Monopsony Denmark 33.75
Model Germany 32.53
Three Union Switzerland 30.26
Models
Bilateral
Sweden 28.42
Monopoly United Kingdom 24.71
Minimum Wage France 23.89
Wage United States 23.17
Differentials
Australia 23.09
Pay for
Performance Japan 21.90
Last Word Canada 21.42
Italy 20.48
Key Terms Korea 11.52
Taiwan 5.97
End Show Mexico 2.50
Source: U.S. Bureau of Labor Statistics, 2006
26-4 Copyright 2008 The McGraw-Hill Companies
 Real Wages and Productivity
Labor Wages
• Secular Growth of Real
Wages
and Earnings
Real Wages and
Productivity
Purely
Competitive
Labor Market
• Long Run Trend of Real
Monopsony
Model
Three Union
Wages in the U.S.
Models
S2020
Real Wage Rate (Dollars)

Bilateral
Monopoly
Minimum Wage
Wage S2000
Differentials S1900 S1950
Pay for
Performance
Last Word
D2020
D2000
D1950
Key Terms
D1900
End Show
Quantity of Labor
26-5 Copyright 2008 The McGraw-Hill Companies
 Purely Competitive Labor Market
Labor Wages
and Earnings
• Market Demand for
Labor
Real Wages and
Productivity
Purely
Competitive
Labor Market
Monopsony
Model
• Market Supply for Labor
Three Union
Models
Bilateral
Monopoly
• Labor Market
Equilibrium
Minimum Wage
Wage
Differentials
Pay for
Performance
Last Word • MRP = MRC Rule
Graphically…
Key Terms

End Show

26-6 Copyright 2008 The McGraw-Hill Companies

 Purely Competitive Labor Market
Labor Wages
and Earnings
Real Wages and
Productivity Labor Market Individual Firm
Purely
Competitive a
Labor Market S
Monopsony

Wage Rate (Dollars)

Wage Rate (Dollars)

Model
Three Union
Models e b
Bilateral
($10) ($10) s=MRC
WC WC
Monopoly
Minimum Wage
Wage
D=MRP
(∑ mrps)
Differentials d=mrp
Pay for c
Performance 0 QC 0 qC
Last Word (1000) (5)
Quantity of Labor Quantity of Labor
Key Terms

End Show
G 26.1
26-7 Copyright 2008 The McGraw-Hill Companies
 Monopsony Model
Labor Wages
and Earnings
• Monopsony O 26.1

• Upward-Sloping Labor
Real Wages and
Productivity
Purely
Competitive
Labor Market
Monopsony
Model
Supply to Firm
Three Union
Models
Bilateral
• MRC Higher Than the
Monopoly
Minimum Wage
Wage
Wage Rate
Differentials
Pay for
Performance
• Equilibrium Wage and
Employment
Last Word

Key Terms

End Show
Graphically…
G 26.2
26-8 Copyright 2008 The McGraw-Hill Companies
 Monopsony Model
Labor Wages
and Earnings
Monopsonistic Labor Market
Real Wages and
Productivity MRC W 26.1
Purely S
Competitive
Wage Rate (Dollars)
Labor Market
Monopsony b
Model
Three Union
Models Wc a
Bilateral
Monopoly Wm c
Minimum Wage
Wage MRP
Differentials
Pay for
Performance
Last Word 0 Qm Qc

Key Terms Quantity of Labor

End Show
Examples of Monopsony Power
26-9 Copyright 2008 The McGraw-Hill Companies
 Three Union Models
Labor Wages
• Demand Enhancement
and Earnings
Real Wages and
Model
Productivity
Purely – Increase Product Demand
Competitive
Labor Market – Increase Productivity
Monopsony
Model
Three Union
– Alter the Price of Other
Models
Bilateral
Inputs
Monopoly S
Minimum Wage
Wage Rate (Dollars)

Wage
Increase
Differentials
Pay for Wu In Demand
Performance
Wc
Last Word
D2
Key Terms
D1
End Show Qc Qu
Quantity of Labor
26-10 Copyright 2008 The McGraw-Hill Companies
 Three Union Models
Labor Wages
• Exclusive or Craft Union
Model
and Earnings
Real Wages and
Productivity
Purely
Competitive – Restricted Immigration
Labor Market
Monopsony
Model
– Reduced Child Labor
Three Union
Models – Encouraged Compulsory
Bilateral
Monopoly
Minimum Wage Retirement
Wage
Differentials
Pay for
– Shorter Hour Workweek
Performance
Last Word – Exclusive Unionism
Key Terms – Occupational Licensing
End Show Graphically…
26-11 Copyright 2008 The McGraw-Hill Companies
 Three Union Models
Labor Wages
• Exclusive or Craft Union
Model
and Earnings
Real Wages and
Productivity
Purely
Competitive
S2
Labor Market S1
Monopsony
Wage Rate (Dollars)

Model
Three Union
Models
Bilateral
Monopoly Decrease
Wu
Minimum Wage
Wage
In Supply
Differentials Wc
Pay for
Performance
Last Word
D
Key Terms
Qu Qc
End Show
Quantity of Labor
26-12 Copyright 2008 The McGraw-Hill Companies
 Three Union Models
Labor Wages
• Inclusive or Industrial
and Earnings
Real Wages and
Union Model
Productivity
Purely – Inclusive Unionism
Competitive
Labor Market
S
Monopsony
Wage Rate (Dollars)

Model
Three Union
Models
Bilateral a b
Monopoly Wu e
Minimum Wage
Wage Wc
Differentials
Pay for
Performance
Last Word
D
Key Terms
Qu Qc Qe
End Show
Quantity of Labor
26-13 Copyright 2008 The McGraw-Hill Companies
 Three Union Models
Labor Wages
• Wage Increases and
and Earnings
Real Wages and
Productivity
Purely
Unemployment
Competitive
Labor Market
Monopsony
• Average 15% Higher
Wages
Model
Three Union
Models
Bilateral
Monopoly
Minimum Wage
Wage
• Reduced Employment
Levels Corrected by:
Differentials
Pay for
Performance

–Growth
Last Word

Key Terms

End Show –Elasticity

26-14 Copyright 2008 The McGraw-Hill Companies
 Bilateral Monopoly
• Indeterminate Outcome
Labor Wages
and Earnings
Real Wages and • Desirability of Bilateral
Productivity
Purely
Competitive
Monopoly
Labor Market
Monopsony MRC S
Model
Wage Rate (Dollars)

Three Union
Models
Bilateral
Monopoly
Minimum Wage Wu
Wage
Differentials a
Wc
Pay for
Performance
Last Word Wm

Key Terms D=MRP

End Show
Qu=Qm Qc
Quantity of Labor
26-15 Copyright 2008 The McGraw-Hill Companies
 Minimum Wage
Labor Wages
and Earnings
• Case Against the
Real Wages and
Productivity
Purely
Minimum Wage
• Case For the Minimum
Competitive
Labor Market
Monopsony
Model
Three Union
Models
Wage
Bilateral
Monopoly
Minimum Wage • State and Locally Set
Rates
Wage
Differentials
Pay for
Performance
Last Word
• Evidence and
Conclusions
Key Terms

End Show

26-16 Copyright 2008 The McGraw-Hill Companies

 Wage Differentials
Average Annual Wages in
Labor Wages
and Earnings Selected Occupations, 2005
Real Wages and
Productivity
Occupation Annual Average Wages
Purely Surgeons $177,690
Competitive Aircraft Pilots 135,040
Labor Market Petroleum Engineers 97,350
Monopsony
Model Financial Managers 96,620
Three Union Law Professors 95,570
Models Chemical Engineers 79,230
Bilateral
Monopoly
Dental Hygienists 60,620
Minimum Wage Registered Nurses 56,880
Wage Police Officers 47,270
Differentials Electricians 45,630
Pay for
Performance Travel Agents 37,750
Last Word Barbers 24,700
Retail Salespersons 23,170
Key Terms Recreation Workers 22,420
Teacher Aides 21,100
End Show
Fast Food Cooks 15,500
Source: Bureau of Labor Statistics, 2006
26-17 Copyright 2008 The McGraw-Hill Companies
 Wage Differentials
Labor Wages
and Earnings
• Marginal Revenue
Real Wages and
Productivity
Purely
Productivity
• Noncompeting Groups
Competitive
Labor Market
Monopsony
Model
Three Union
Models
–Ability
Bilateral
Monopoly
Minimum Wage –Education and Training
Wage
Differentials
Pay for • Human Capital O 26.2
Performance
Last Word
• Compensating
Differences
Key Terms

End Show

26-18 Copyright 2008 The McGraw-Hill Companies

 Wage Differentials
Education Levels and Individual Annual Earnings
Labor Wages 160,000
and Earnings Educational

Annual Earnings (Thousands of Dollars)

Real Wages and
140,000
Attainment
Productivity
Purely
Competitive 120,000
Labor Market
Monopsony Professional Degree
Model 100,000
Three Union
Models 80,000
Bilateral Bachelor’s Degree
Monopoly
Minimum Wage 60,000
Wage
Differentials Associate’s Degree
Pay for 40,000
Performance
Last Word 20,000
High School Diploma
Key Terms
0
18-24 25-34 35-44 45-54 55-64 65+
End Show
Age
26-19 Copyright 2008 The McGraw-Hill Companies
 Wage Differentials
Labor Wages • Marginal Revenue
• Market Imperfections
and Earnings
Real Wages and
Productivity

–Lack of Job
Purely
Competitive
Labor Market

Information
Monopsony
Model
Three Union
Models
Bilateral
Monopoly
–Geographic Immobility
Minimum Wage
Wage
Differentials
–Unions and
Pay for
Performance Government Restraints
–Discrimination
Last Word

Key Terms

End Show

26-20 Copyright 2008 The McGraw-Hill Companies

 Pay for Performance
Labor Wages
• The Principal-Agent
and Earnings
Real Wages and
Problem Revisited O 26.3

• Incentive Pay Plan

Productivity
Purely
Competitive
Labor Market
Monopsony
Model
• Piece Rates
Three Union
Models • Commissions or Royalties
• Bonuses, Stock Options,
Bilateral
Monopoly
Minimum Wage
Wage
Differentials
Pay for
and Profit Sharing
Performance
Last Word • Efficiency Wages
• Negative Side-Effects of
O 26.4
Key Terms

End Show
Pay for Performance
26-21 Copyright 2008 The McGraw-Hill Companies
 Are Chief Executive Officers
Las
t (CEOs) Overpaid?
ord
Labor Wages
and Earnings
• WCurrent U.S. CEO Salaries are High
Real Wages and Relative to Domestic or Foreign Firms
Productivity
Purely • Several Possible Reasons
Competitive
Labor Market • Marginal Productivity Impact by Good
Monopsony
Model Decisions
Three Union
Models • Top Salaries Like “Prize” Goals for all
Bilateral
Monopoly
to Have as a Goal Impacting Many
Minimum Wage Jobs
Wage
Differentials • High Salary Bias by Board Members
Pay for
Performance Due to their Own Previous
Last Word Performances
Key Terms • Some Argue High Salaries are
Unjustified and are Unfair to
End Show
Stockholders
26-22 Copyright 2008 The McGraw-Hill Companies
 Key Terms
Labor Wages
• wage rate • minimum wage
and Earnings
Real Wages and • nominal wage • wage differentials
Productivity
Purely • real wage • marginal revenue pr
Competitive
Labor Market oductivity
Monopsony
• purely competitive l
Model abor market • noncompeting grou
Three Union
ps
Models
Bilateral
• monopsony
Monopoly • human capital
Minimum Wage • exclusive unionism
Wage • compensating differ
Differentials
Pay for
• occupational licensi ences
Performance ng
Last Word • incentive pay plan
• inclusive unionism
Key Terms
• bilateral monopoly
End Show

26-23 Copyright 2008 The McGraw-Hill Companies

 Next Chapter Preview…
Labor Wages
and Earnings
Real Wages and
Productivity
Purely
Competitive
Labor Market
Monopsony
Model
Three Union

Rent, Interest,
Models
Bilateral
Monopoly

and Profit
Minimum Wage
Wage
Differentials
Pay for
Performance
Last Word

Key Terms

End Show

26-24 Copyright 2008 The McGraw-Hill Companies