Labor, Wages, and

Earnings
General Level of
Wages
Real Wages and
Productivity
Purely Competitive
Labor Market

15

C HAPTE R

Monopsony Model
Three Union Models
Bilateral Monopoly
Model
Minimum Wage
Controversy
Wage Differentials
Pay For Performance
Key Terms

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Wage
Determination
Copyright McGraw-Hill/Irwin, 2005

LABOR, WAGES, AND EARNINGS

Labor, Wages, and
Earnings
General Level of
Wages
Real Wages and
Productivity
Purely Competitive
Labor Market
Monopsony Model
Three Union Models
Bilateral Monopoly
Model
Minimum Wage
Controversy
Wage Differentials
Pay For Performance
Key Terms

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Wages Defined...
Wages - - Salary - - Earnings

Wage Rate
Nominal Wages
Real Wages
International differences...
Copyright McGraw-Hill/Irwin, 2005

GLOBAL PERSPECTIVE
Labor, Wages, and
Earnings
General Level of
Wages

Hourly Wages of Production Workers,

Selected Nations

Real Wages and

Productivity
Purely Competitive
Labor Market
Monopsony Model
Three Union Models
Bilateral Monopoly
Model
Minimum Wage
Controversy
Wage Differentials
Pay For Performance
Key Terms

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Germany
Denmark
Switzerland
United States
Japan
Sweden
United Kingdom
France
Canada
Italy
Australia
Korea
Taiwan
Mexico

Hourly Pay in U.S. Dollars, 2001

5
10
15
20

25

Source: U.S. Bureau of Labor Statistics, 2003

Copyright McGraw-Hill/Irwin, 2005

GENERAL LEVEL OF WAGES

Labor, Wages, and
Earnings
General Level of
Wages
Real Wages and
Productivity
Purely Competitive
Labor Market
Monopsony Model
Three Union Models
Bilateral Monopoly
Model
Minimum Wage
Controversy
Wage Differentials
Pay For Performance
Key Terms

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Role of Productivity
Plentiful Capital
Access to Abundant
Natural Resources
Advanced Technology
Labor Quality
Other Factors
Copyright McGraw-Hill/Irwin, 2005

Labor, Wages, and

Earnings
General Level of
Wages
Real Wages and
Productivity
Purely Competitive
Labor Market

REAL WAGES AND

PRODUCTIVITY
Growth in real income (earnings)
Growth in output per worker-hour

Monopsony Model
Three Union Models
Bilateral Monopoly
Model
Minimum Wage
Controversy
Wage Differentials
Pay For Performance
Key Terms

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Can only grow at

about the same rate!

Secular Growth of Real Wages

Copyright McGraw-Hill/Irwin, 2005

Labor, Wages, and

Earnings
General Level of
Wages
Real Wages and
Productivity
Purely Competitive
Labor Market

PURELY COMPETITIVE
LABOR MARKET
Purely competitive labor market:

Many Firms

Monopsony Model
Three Union Models
Bilateral Monopoly
Model
Minimum Wage
Controversy
Wage Differentials

Numerous Qualified Workers

Wage Taker Behavior

Pay For Performance

Key Terms

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Market Demand for Labor

Next
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Market Supply of Labor

Copyright McGraw-Hill/Irwin, 2005

Labor, Wages, and

Earnings

PURELY COMPETITIVE LABOR

MARKET EQUILIBRIUM
S

General Level of
Wages

Includes
Normal
Profit

Purely Competitive
Labor Market
Monopsony Model
Three Union Models
Bilateral Monopoly
Model
Minimum Wage
Controversy
Wage Differentials
Pay For Performance

Wage Rate (dollars)

Real Wages and

Productivity

$10

Wc

D = MRP
( mrps)

Key Terms

Wc

NonLabor
Costs

S = MRC

($10)

Labor
Costs
d = mrp

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(1000)

(5)

Quantity of Labor

Quantity of Labor

Labor Market

Individual Firm

Copyright McGraw-Hill/Irwin, 2005

Labor, Wages, and

Earnings

PURELY COMPETITIVE LABOR

MARKET EQUILIBRIUM
S

General Level of
Wages

Includes
Normal
Resource Profit

Purely Competitive
Labor Market
Monopsony Model
Three Union Models
Bilateral Monopoly
Model
Minimum Wage
Controversy
Wage Differentials
Pay For Performance

Wage Rate (dollars)

Real Wages and

Productivity

Wc

Marginal
NonCost (MRC) will
be
Labor
Costs to
constant$10
and Wequal
resource price
Labor
(the wage
D = MRP rate).

S = MRC

($10)

( mrps)

Key Terms

Costs

d = mrp
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(1000)

(5)

Quantity of Labor

Quantity of Labor

Labor Market

Individual Firm

Copyright McGraw-Hill/Irwin, 2005

MONOPSONY MODEL
Labor, Wages, and
Earnings
General Level of
Wages
Real Wages and
Productivity
Purely Competitive
Labor Market
Monopsony Model
Three Union Models
Bilateral Monopoly
Model
Minimum Wage
Controversy
Wage Differentials
Pay For Performance

Single Buyer of a type of

labor
The type of labor is
relatively immobile
Wage Maker Behavior

Key Terms

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Upward-Sloping Supply
Curve to Firm
Copyright McGraw-Hill/Irwin, 2005

MONOPSONISTIC
LABOR MARKET

Labor, Wages, and

Earnings
General Level of
Wages

Purely Competitive
Labor Market
Monopsony Model
Three Union Models
Bilateral Monopoly
Model
Minimum Wage
Controversy
Wage Differentials
Pay For Performance

Wage Rate (dollars)

Real Wages and

Productivity

In monopsony
MRC lies above
the supply curve.

Key Terms

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Quantity of Labor
Copyright McGraw-Hill/Irwin, 2005

MONOPSONISTIC
LABOR MARKET

Labor, Wages, and

Earnings

MRC

General Level of
Wages

Purely Competitive
Labor Market
Monopsony Model
Three Union Models
Bilateral Monopoly
Model
Minimum Wage
Controversy
Wage Differentials
Pay For Performance

Wage Rate (dollars)

Real Wages and

Productivity

MRP = MRC
Wm
MRP

Qm units of
labor hired

Key Terms

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Qm

Quantity of Labor
Copyright McGraw-Hill/Irwin, 2005

MONOPSONISTIC
LABOR MARKET

Labor, Wages, and

Earnings

MRC

General Level of
Wages

Purely Competitive
Labor Market
Monopsony Model
Three Union Models
Bilateral Monopoly
Model
Minimum Wage
Controversy
Wage Differentials
Pay For Performance

Wage Rate (dollars)

Real Wages and

Productivity

The competitive
solution would
result in a higher
wage and greater
Employment.

Wc
Wm

MRP

Key Terms

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Qm Qc

Quantity of Labor
Copyright McGraw-Hill/Irwin, 2005

MONOPSONISTIC
LABOR MARKET

Labor, Wages, and

Earnings

MRC

General Level of
Wages

Purely Competitive
Labor Market
Monopsony Model
Three Union Models
Bilateral Monopoly
Model
Minimum Wage
Controversy
Wage Differentials
Pay For Performance

Wage Rate (dollars)

Real Wages and

Productivity

Monopsonists maximize
The competitive
profits by hiring a smaller
solution would
number of workersresult
andin a higher
Wc
wage and greater
thereby paying a less-thanWm
employment
competitive wage rate.
MRP

Key Terms

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Qm Qc

Quantity of Labor
Copyright McGraw-Hill/Irwin, 2005

THREE UNION MODELS

Labor, Wages, and
Earnings

Demand-Enhancement Model

General Level of
Wages

Purely Competitive
Labor Market
Monopsony Model
Three Union Models
Bilateral Monopoly
Model
Minimum Wage
Controversy
Wage Differentials
Pay For Performance
Key Terms

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End
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15 - 14

Wage Rate (dollars)

Real Wages and

Productivity

Wc
D1

Next
Slide

Qc

Quantity of Labor
Copyright McGraw-Hill/Irwin, 2005

THREE UNION MODELS

Labor, Wages, and
Earnings

Demand-Enhancement Model

General Level of
Wages

Purely Competitive
Labor Market
Monopsony Model
Three Union Models
Bilateral Monopoly
Model
Minimum Wage
Controversy
Wage Differentials
Pay For Performance
Key Terms

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End
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Wage Rate (dollars)

Real Wages and

Productivity

...by increasing
product demand

Wu
Wc

D2
D1

Next
Slide

Qc

Qu

Quantity of Labor
Copyright McGraw-Hill/Irwin, 2005

THREE UNION MODELS

Labor, Wages, and
Earnings

...by increasing
product demand
S ...by increasing
productivity

Demand-Enhancement Model

Real Wages and

Productivity
Purely Competitive
Labor Market
Monopsony Model
Three Union Models
Bilateral Monopoly
Model
Minimum Wage
Controversy
Wage Differentials
Pay For Performance
Key Terms

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End
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15 - 16

Wage Rate (dollars)

General Level of
Wages

Wu
Wc

D2
D1

Next
Slide

Qc

Qu

Quantity of Labor
Copyright McGraw-Hill/Irwin, 2005

THREE UNION MODELS

Labor, Wages, and
Earnings

...by increasing
product demand
S ...by increasing
productivity
...by increasing
the price of
substitutes

Demand-Enhancement Model

Real Wages and

Productivity
Purely Competitive
Labor Market
Monopsony Model
Three Union Models
Bilateral Monopoly
Model
Minimum Wage
Controversy
Wage Differentials
Pay For Performance
Key Terms

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End
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15 - 17

Wage Rate (dollars)

General Level of
Wages

Wu
Wc

D2
D1

Next
Slide

Qc

Qu

Quantity of Labor
Copyright McGraw-Hill/Irwin, 2005

THREE UNION MODELS

Labor, Wages, and
Earnings

Exclusive or Craft Model

Real Wages and

Productivity
Purely Competitive
Labor Market
Monopsony Model
Three Union Models
Bilateral Monopoly
Model
Minimum Wage
Controversy
Wage Differentials
Pay For Performance
Key Terms

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End
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Wage Rate (dollars)

General Level of
Wages

S1

Wc
D

Next
Slide

Qc

Quantity of Labor
Copyright McGraw-Hill/Irwin, 2005

THREE UNION MODELS

Labor, Wages, and
Earnings

Exclusive or Craft Model

Real Wages and

Productivity
Purely Competitive
Labor Market
Monopsony Model
Three Union Models
Bilateral Monopoly
Model
Minimum Wage
Controversy
Wage Differentials
Pay For Performance
Key Terms

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End
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Wage Rate (dollars)

General Level of
Wages

...restrictive
S2
membership
S1 policies

Wu
Wc
D

Next
Slide

Qu

Qc

Quantity of Labor
Copyright McGraw-Hill/Irwin, 2005

THREE UNION MODELS

Labor, Wages, and
Earnings

Exclusive or Craft Model

Real Wages and

Productivity
Purely Competitive
Labor Market
Monopsony Model
Three Union Models
Bilateral Monopoly
Model
Minimum Wage
Controversy
Wage Differentials
Pay For Performance
Key Terms

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End
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15 - 20

Wage Rate (dollars)

General Level of
Wages

...restrictive
S2
membership
S1 policies
...restricting
labor supply of
the economy as
a whole

Wu
Wc
D

Next
Slide

Qu

Qc

Quantity of Labor
Copyright McGraw-Hill/Irwin, 2005

THREE UNION MODELS

Labor, Wages, and
Earnings

Exclusive or Craft Model

Real Wages and

Productivity
Purely Competitive
Labor Market
Monopsony Model
Three Union Models
Bilateral Monopoly
Model
Minimum Wage
Controversy
Wage Differentials
Pay For Performance
Key Terms

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End
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15 - 21

Wage Rate (dollars)

General Level of
Wages

Wu
Wc

...restrictive
S2
membership
S1 policies
...restricting
labor supply of
the economy as
a whole
occupational
licensing
D

Next
Slide

Qu

Qc

Quantity of Labor
Copyright McGraw-Hill/Irwin, 2005

THREE UNION MODELS

Labor, Wages, and
Earnings

Inclusive or Industrial Model

...by organizing
S virtually all
workers and
thereby control
of the supply
curve for labor
causing

Real Wages and

Productivity
Purely Competitive
Labor Market
Monopsony Model
Three Union Models
Bilateral Monopoly
Model
Minimum Wage
Controversy
Wage Differentials
Pay For Performance
Key Terms

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End
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15 - 22

Wage Rate (dollars)

General Level of
Wages

Wc
D

Next
Slide

Qc

Quantity of Labor
Copyright McGraw-Hill/Irwin, 2005

THREE UNION MODELS

Labor, Wages, and
Earnings

Inclusive or Industrial Model

...by organizing
S virtually all
workers and
thereby control
of the supply
curve for labor
causing

Real Wages and

Productivity
Purely Competitive
Labor Market
Monopsony Model
Three Union Models
Bilateral Monopoly
Model
Minimum Wage
Controversy
Wage Differentials
Pay For Performance
Key Terms

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End
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Wage Rate (dollars)

General Level of
Wages

Wu
Wc

D
Next
Slide

Qu

Qc

Qe

Quantity of Labor
Copyright McGraw-Hill/Irwin, 2005

Labor, Wages, and

Earnings
General Level of
Wages
Real Wages and
Productivity
Purely Competitive
Labor Market
Monopsony Model
Three Union Models
Bilateral Monopoly
Model
Minimum Wage
Controversy
Wage Differentials
Pay For Performance
Key Terms

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WAGE INCREASES
AND UNEMPLOYMENT
Union members receive
about 15% higher wages
Negative impact on level of
employment
Negative unemployment effect
reduced by:
Growth
Elasticity
Copyright McGraw-Hill/Irwin, 2005

BILATERAL MONOPOLY MODEL

Monopsonist & Union Seek
Different Wage Rates...

Labor, Wages, and

Earnings
General Level of
Wages

Purely Competitive
Labor Market
Monopsony Model
Three Union Models
Bilateral Monopoly
Model
Minimum Wage
Controversy
Wage Differentials
Pay For Performance
Key Terms

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End
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15 - 25

Wage Rate (dollars)

Real Wages and

Productivity

MRC

economic
theory
cannot
determine
the actual
outcome.

Wu
Wc
Wm

D
D=MRP
Next
Slide

Qu=Qm Qc

Quantity of Labor
Copyright McGraw-Hill/Irwin, 2005

BILATERAL MONOPOLY MODEL

Monopsonist & Union Seek
Different Wage Rates...

Labor, Wages, and

Earnings
General Level of
Wages

Purely Competitive
Labor Market
Monopsony Model
Three Union Models
Bilateral Monopoly
Model
Minimum Wage
Controversy
Wage Differentials
Pay For Performance
Key Terms

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End
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15 - 26

Wage Rate (dollars)

Real Wages and

Productivity

MRC

economic
theory
cannot
determine
the actual
outcome.

Wu
Wc
Wm

D
D=MRP
Next
Slide

DesirabilityQof=QBilateral
Monopoly
Q
u

Quantity of Labor
Copyright McGraw-Hill/Irwin, 2005

Labor, Wages, and

Earnings
General Level of
Wages
Real Wages and
Productivity
Purely Competitive
Labor Market
Monopsony Model
Three Union Models
Bilateral Monopoly
Model
Minimum Wage
Controversy
Wage Differentials
Pay For Performance
Key Terms

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MINIMUM WAGE
CONTROVERSY
Case Against
Minimum Wage
Case For Minimum
Wage
Evidence and
Conclusions
Copyright McGraw-Hill/Irwin, 2005

Labor, Wages, and

Earnings
General Level of
Wages
Real Wages and
Productivity
Purely Competitive
Labor Market
Monopsony Model
Three Union Models
Bilateral Monopoly
Model
Minimum Wage
Controversy
Wage Differentials
Pay For Performance
Key Terms

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WAGE DIFFERENTIALS
Marginal Revenue
Productivity
Noncompeting Groups
Ability
Education and Training
Investment in Human
Capital
Copyright McGraw-Hill/Irwin, 2005

Labor, Wages, and

Earnings
General Level of
Wages
Real Wages and
Productivity
Purely Competitive
Labor Market
Monopsony Model
Three Union Models
Bilateral Monopoly
Model
Minimum Wage
Controversy
Wage Differentials
Pay For Performance
Key Terms

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WAGE DIFFERENTIALS
Compensating Differences
Nonmonetary Differences

Market Imperfections
Lack of Job Information
Geographical Immobility
Unions & Government
Restraints
Discrimination
Copyright McGraw-Hill/Irwin, 2005

Labor, Wages, and

Earnings
General Level of
Wages
Real Wages and
Productivity
Purely Competitive
Labor Market
Monopsony Model
Three Union Models
Bilateral Monopoly
Model
Minimum Wage
Controversy
Wage Differentials
Pay For Performance
Key Terms

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PAY FOR PERFORMANCE

The Principal-Agent Problem
Incentive Pay Plan
Piece Rates
Commissions or Royalties
Bonuses, Stock Options, &
Profit Sharing
Efficiency Wages
Copyright McGraw-Hill/Irwin, 2005

Labor, Wages, and

Earnings
General Level of
Wages
Real Wages and
Productivity
Purely Competitive
Labor Market
Monopsony Model
Three Union Models
Bilateral Monopoly
Model
Minimum Wage
Controversy
Wage Differentials
Pay For Performance
Key Terms

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PAY FOR PERFORMANCE

Negative Side-Effects of Pay
for Performance
Poor Product Quality
Questionable or Fraudulent
Sales Practices
Disruption of Teamwork
Free Ride by Low Producers
Low Turnover Decreases
Hiring Opportunities
Copyright McGraw-Hill/Irwin, 2005

wage rate
nominal wage
real wage
purely competitive labor
market
monopsony
exclusive unionism
occupational licensing
inclusive unionism
Copyright McGraw-Hill/Irwin, Inc. 2005

bilateral monopoly
minimum wage
wage differentials
marginal revenue
productivity
noncompeting groups
investment in human capital
compensating differences
incentive pay plan
BACK

END

Labor, Wages, and

Earnings
General Level of
Wages

Next:

Real Wages and

Productivity
Purely Competitive
Labor Market
Monopsony Model
Three Union Models
Bilateral Monopoly
Model

Rent, Interest, and Profit

Minimum Wage
Controversy
Wage Differentials
Pay For Performance
Key Terms

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Chapter 16

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Slide

Copyright McGraw-Hill/Irwin, 2005