Chapter 28  Wage Determination     11/02/16

I. Labor Productivity and Market Forces Determine Wages worker quality, management, technology
II. Competitive Model
many independent buyers and sellers with up sloping supply curve
III. Monopsony
one buyer, independent sellers, lower wages
IV. Unions
increase demand for product made and restrict supply of workers
V. Craft Unions vs. Inclusive Industrial Unions
limit supply of workers vs. organize everyone
VI. Bilateral Monopoly monopsony vs. union
VII. Minimum Wage with many mostly politically bias readings
VIII. Wage Differentials is about revenue produced and market power
IX. Worldwide Differences difficult to determine given many differing degrees of socialism.
X. U.S. Economic Normality 1945-2015  explore cause of slow wage growth  p 2 
XI. World Changed and Good Jobs Disappeared
XII, Income Inequality Analysis and Cures

XIII. Can Education Reduce Income Stagnation Serious? 
XIV. Economic Future of Our Children

I. Labor Productivity and Market Forces Determine Wages
    A. Introduction 
      1. Wage determination is of interest because most people
            devote much of their time to wage-earning activities.
        2. Wage earners include both blue and white collar workers
             and professionals.
    B. Factors affecting labor productivity
         1. Quality (health, education, etc.) of the work force.
             a. Educating the Class of 2034
             b. Changing Education Paradigms from the Royal Society
                  for the encouragement of Arts, Manufactures and Commerce
         2. Quantity and quality of capital supporting labor
         3. Use of technology Geekability the New Intelligence
         4. Management efficiency
         5. Business, social and political climate
         6. Cost and availability of natural resources
     C. Wage determination models
         1. Competitive model: many buyers and sellers acting 
             independently such as the market for unskilled workers
         2. Monopoly power models
             a. Monopsony model: one buyer, many sellers
                 such as the one-factory towns of rural America
             b. Union models: one seller of labor
            1) Exclusive craft model: electrical workers
                 2) Inclusive industrial model: auto workers
             c. Bi-lateral monopoly: one buyer and one seller which
                 occurs when unionized workers such as major league
                 baseball players negotiate with one buyer such as major
                 league baseball.
     D. Middle Class Wages
         1. Krugman on the Need for Jobs Policies
         2. Worker Wage Inequality Myth Exposed a lack of skills
             education is not the problem
         3. Union Power and Inequality
         4. Labor Participation And Household Income
Editor's Note:
US corporate governance is a profit based bonus system so much is gained by lowering factor costs (wages, materials..)  when price pressure increase.  The German corporate governance system includes worker representation so wages are to some degree sheltered from price pressures. The US corporate sector recovered faster from the Great Recession than that of Germany while German workers suffered smaller wage losses than US workers.


F. Labor's Share has Gotten Smaller

G. U.S. Outperforms GB Productivity/ Wages Race source

H. Wage Growth For All Are Coming Back

Chart 1: Wage Growth by Type of Job

II. Competitive Model
  A. Many buyers and sellers, from a few to tens-of-thousands of 
         workers and a proportionate number of buyers (companies).
     B. No ingle company has high enough demand
         to affect wages (price).
     C. Workers (supply) act independently.
     D. Industry supply is up sloping as companies must 
         pay higher wages to induce more people to work.
     E. Marginal resource cost (MRC) is the change in total costs
          which results from hiring one more unit of resource.
     F. For a firm buying labor in a competitive market, supply is equal to
          marginal resource cost (MRC) because the firm may buy all the
          workers it desires at the rate set by industry supply and demand.
    G. Worker skills and company needs are very similar.
         An example would be unskilled workers seeking menial work.
    H. In Defense of Sweatshops

III. Monopsony
A. One buyer interacting with many independently acting sellers 
     B. Firms maximize profits by equating marginal resource cost
         (the cost of hiring an additional worker) 
          with marginal revenue product (the revenue generated by 
          the use of an additional worker). 
          1. MRC will be above the supply line as wages must be 
              increased to entice more people to work for a firm. 
          2. The logic here is similar to that of the marginal revenue
              curve being below the demand curve.
     C. A single-payer universal health care system, in which a
         government is the only "buyer" of health care services, is 
         an example of a monopsony. America's defense department is
         another example.
     D. Economic analysis
         1. Pure competition results in more workers being hired 
             at a higher wage rate 
         2. WM < WPC and QM < QPC
     E. Monopsony Model from Wiki
Monopsony Model
     G.  monopsony is not OK Paul Krugman 1019/14
         1. Some agree

             2. Some disagree

Graph from Market Watch

Image result for Competitive labor markets

for Workers

H. Oligopsony a few buyers, often yields similar results. American
tobacco growers face an Oligopsony of cigarette makers, where three companies (Altria, Brown & Williamson, and Lorillard buy almost 90% of all tobacco grown in the US. 

Question Social Median increase the monopsony power of unrelated buyers of labor especially in smaller markets.


6 1 6 6 4
7 2 14 8 3
9 3 27 13 2
12 4 48 21 1


Lets Remember What Unions Have Done for America has extensive information and links
IV. Unions  
A. Introduction
        1. A union is an organization of workers selling their
            services collectively.
        2. Unions have many goals.
            a. Primary goal of higher income is becoming less important.
            b. Recent emphasis has been on employment security.
    B. There are many methods of achieving higher wages.
        1. Increase demand (MRPL) for labor
            a. Increase product demand   
               1) Advertising the union label
               2) Sponsoring trade restrictions such as tariffs and quotas
            b. Increase the productivity of workers
               1) Encourage cooperation with labor-management committees 
               2. Negotiate worker training and education programs
        2. Control the supply of workers hired
            a. Require apprenticeships, licenses   
            b. Restrict immigration and child labor
 c. Encourage shorter workweek and family leave programs
            d. Keep unneeded jobs management wants to eliminate
            e. Require closed shops which limit hiring to union members
            f. Require union shops where new workers to join after a set period
            g. Against open shops where all may work, joining union is voluntary. 
C. Wagner Act National Labor Relations
      Act of 1935 became known as the "Magna Charta" of labor
       because it increased union power.
       1. It made company-sponsored unions illegal, stopped company
           interference with unionizing activity (strikes), prohibited 
           discrimination against union members, and required
            companies to bargain in good faith. 
       2. National Labor Relations Board set up to
           investigate/stop unfair labor practices
 D. Taft Hartley Act  of 1947 decreased union power.
      1. Outlawed a  closed shop where companies must hire union
      2. Allowed state right-to-work-laws make union shops requiring
          workers eventual become union members, illegal in 21
          states. (Right to Work States)
      3. Outlawed Featherbedding  (keeping positions even though
           there is no need, i.e. firemen on a electric train) 
      4. Secondary boycotts or sympathy strikes where companies
          the employer does business with also feel a boycott)   
E. Unemployment Risk and Unions 11/16

V. Craft and Inclusive Union

      A. Exclusive Craft Unions vs.

         1. Organized in 1886 by Samuel Gompers
             as the American Federation of Labor - AFL
             after he lost his skilled job to a machine.
a. Each trade was autonomous.
             b. Union was not political. 

B. Inclusive Industrial Union

    1. The Congress of Industrial Organizations (CIO)
was organized in 1936 by John L. Lewis who
        broke with the AFL because mass production workers
        need a different type organization. 
        See Decline and resurgence of the US auto industry


         2. Skilled workers were organized.      2. Unskilled workers were organized.
         3. High skill requirements naturally limited supply
             and unions tried to reinforce limited supply.
     3. Limited skills make limiting supply impractical.
         4. Tried to shift supply of workers to the left
             with licensing, apprenticeships, child labor
             laws, etc. to increase wages.
     4. Controlled  supply of workers and
         emphasized collective bargaining
         to increase wages.









In 1955 the AFL and CIO merged into the AFL-CIO.

May, 2011 The Rise of the McWorker 
The evidence points to the latter. According to a recent analysis by the National Employment Law Project (NELP), the biggest growth in private-sector job creation in the past year occurred in positions in the low-wage retail, administrative, and food service sectors of the economy. While 23% of the jobs lost in the Great Recession that followed the economic meltdown of 2008 were “low-wage” (those paying $9-$13 an hour), 49% of new jobs added in the sluggish “recovery” are in those same low-wage industries. On the other end of the spectrum, 40% of the jobs lost paid high wages ($19-$31 an hour), while a mere 14% of new jobs pay similarly high wages. 
For more read  Welcome to the McJobs Recovery Andy Kroll, TomDispatch


Have American CEO's Created 
an Exclusive Craft Union?


Unions: Good or Bad? from the Motley Fool

States with the largest declines in collective bargaining have had slower pay growth: Median hourly compensation growth and change in state collective bargaining coverage, 1979–2012

VI. Bilateral Monopoly
      A. Monopsony vs. union (monopoly) 
      B. Could the net result be close to that of a competitive market? 
           1. The answer depends upon negotiation results. 
           2. If bargaining power is split equally, wages paid and quantity hired could be similar
               to that of pure competition but below the union rate and above the monopoly rate.
      C. THEODORE ROOSEVELT took on the corporate monopoly
           trusts that control railroad rates and routes and thus destroyed small towns and farms.
      D. National Review reports that 0.55  percent of the federal work force were fired in 2011.
           That was 1/5 the separation rate for the private sector. A firing offense can take 18 months
           to process so many workers just get transferred.  6/7/13 The Week magazine.

      E. Bilateral monopoly from Wiki

Public vs. Private U.S. Compensation


Workers of the World Unit

Sources Congressional Budget Office note total compensation is reported.

Mother Jones

 The Economist

VII. Minimum Wage
      A. A minimum wage is a price floor put on wages to
          stop them from falling below some legislated level. 

      B. The result may be a surplus of workers (unemployment). See graph
      C. Studies conducted in the 1990's showed that increasing the
           minimum wage did not increase unemployment though the
           economic expansion of the period created a shortage of
           workers. Seattle is the latest study.

Seattle's Minimum Wage Experiment is Over


The unemployment rate in the city of Seattle – the tip of the spear when it comes to minimum wage experiments – has now hit a new cycle low of 3.4%, as the city continues to thrive. I’m not sure what else there is to say at this point. The doomsayers were wrong."


   D. Minimum Wage Review Video
E. Readings
"The Economic Debate over Minimum Wage Effects
         2. Minimum Wage by State
         3. What happens if fast food workers
got a big raises         
         4. Case study San-Jose Hiked Minimum Wage 4/14/14
Living wage calculator based on typical expenses
in specific locations from MIT. Source
        6.  Purchasing Power of Minimum Wage Varies by State
. Employment Elasticity to Minimum Wage
        8. Flat World May be Keeping US Wages Down

Who Works For Minimum Wage has much data.

L. Additional Minimum Wage Material
1. Many states have departed from the federal
       l minimum wage.
   2. Washington has the highest minimum wage
        in the country at $7.93 as of January 1, 2007.
   3. Material on the minimum wage visit
       a. Almanac of Policy Issues
       b. Wikipedia
       c. U.S. Minimum Wage History

       d. 2010 State Minimum Wages
  4. Germany has a marginal employment
      rather tan a minimum wage
  5. Living wage by state from MIT
6. Study Reduces Minimum Wage Fears           
State buying
  8. Facts About the Minimum Wage
  9. Should Minimum Wage be Increased 5 min video


In some states, the cost of living varies widely


Destination Unknown
Large increases in the minimum wage could have severe long-term effects   7/25/15

U.S. minimum wage value over time, adjusted

Click for source





VIII Wage Differentials
       A. Wages are determined by marginal revenue product so entertainers
            who sell the most tickets make the most money.
       B.  wage differentials between occupations
       C. Work requirements differ so many workers with different ability and
            education form non-competing groups.
       D  Non monetary compensation, sometimes called psychic income,
            differ so working in a white shirt air-conditioned office might pay
            less them working outside in the heat or cold.
       E. Performance Pay
           1. Bonus, stock options, and profit sharing for corporate executives
               and revenue producers    
           2. Piece Rate, commissions and royalties are common.
           3. Negative side affect
               a. product quality
               b. aggressive, sometime illegal and unethical, sales technique
               c. short run attitude at e the expense of others
           F. Pay-for-Performance Doesn’t Always Pay
           G. reported that 2014 WS bonuses were almost twice the
                earnings the 1.03 million full time workers earning the Federal
                minimum wage. 3/27/15 The Week magazine.


Wages Stagnant for Most Workers

Oil Embargo Changed the Rules, Foreign Competition
Won at First Then Wages Growth Lost to Profits.

       H. Economic gain from investing in education is going down.
            1. Supply of Bachelors Degrees is up


              a. Over the last 20 years, the need for above average college graduate
               has increased from about 22% to about 31%.
           b. There was a slight over supply until 1995 when a dramatic increase in
                college graduates made the over supply substantial.
           c. The mean household income peaked in 2000 and since has dropped10%.
               a. Household income is biased higher by young people delaying 
                   children thus increasing the opportunity of two-income families.
               b. The within cohort variability has been increasing as the better 
                   skilled college graduates have been earning much more than
                   average and the college graduates with few usable skills earn
                   substantially less, little more than a high school graduate.



Image result for college wage premium

Look Who's Talking a New  Conventional Wisdom on Labor
1. The State of Working America 
2. Applied Economics         
3. Capital Ideas Evolving     
4. The Lexus and the Olive Tree   
5. Capitalism, Socialism, and Democracy
6. Job Polarization
7. Indentured servant we have come a long way
How to Shorten the working Week
9. Has  Purely Competitive Adjustment Causing a New Normal for Wage Gains?
From chapter 23.
10. Comprehensive immigration bill disaster for US workers The Economic Populist
11. Tech companies lobbying immigration USA Today 4/30/13
Have and Have not: New study shows just how slow it is to change social class
13. Kevin Erdmann on capital income, rental income and labor compensation
with links it is extensive and may be read after the next chapter.
14. Progress and Poverty depicted the superficial contradictory world of the Gilded Age
15. Trade Agreements and U.S Jobs
16. Wage Growth May Be A Poor Indicator Of Labor Market Slack
The US Beveridge curve continues to show the skills mismatch in the labor force as broader unemployment measures remain elevated relative to the level of job openings.


IX. Worldwide Differences

U.S. Top Is Earners High
Low Earners Low


High Inequality Results Though Median is Highest

Poor Countries Have High Labor Costs



Comparing Payroll Taxes


Europe Tries to Limit Socialism's Unintended Consequences


Hours Worked Have Been Dropping


XII. Education and Income

Changing Education Paradigms from the Royal Society for Encouragement of Arts, Manufacturing, Commerce is a must watch 14 minute video which explores how our current educational system has gone in an unproductive detour and stifles creativity.

Educational Ideas From Economists  
has more interesting thoughts.

Educating the Class of 2030

/Economics of a College Education

Business Book Mall sponsors

Does this mean that MRP 
does not equal MRC

Chart is from Bureau of Labor Statistic PDF (3.5M), page 15
Data are in United States dollars at current prices and current purchasing power parity for the reference year.
Rank Country Median
1  Luxembourg 34,821 2010
2  Norway 32,820 2010
3  Switzerland 31,493 2009
4  United States 29,056 2010
5  Canada 28,914 2010
6  Austria 28,089 2010
7  Australia 27,946 2010
8  Denmark 26,744 2010
9  Netherlands 25,715 2010
10  Germany 25,569 2010
11  Finland 24,778 2010
12  Belgium 24,709 2010
13  Sweden 24,614 2010
14  Iceland 24,610 2010
15  France 24,221 2010
16  United Kingdom 24,047 2010
17  South Korea 23,994 2011
18  New Zealand 23,444 2009
19  Italy 21,894 2010
20  Ireland 21,804 2009
21  Japan 21,410 2009
22  Slovenia 20,385 2010
23  Spain 18,736 2010
24  Israel 16,957 2010
25  Greece 16,570 2010
26  Czech Republic 15,348 2010
27  Slovakia 14,473 2010
28  Portugal 14,064 2010
29  Poland 13,414 2010
30  Estonia 11,564 2010
31  Hungary 10,319 2009
32  Chile 9,577 2011
33  Turkey 7,944 2009
34  Mexico 5,132 2010


low wage jobs

ssa average median wage 2013 labor-force-participation-1950-2014


Source: economic populist org has much more data.


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 Rent, Interest and Profit
Table of Contents
Economics Internet Library
Data are in United States dollars at current prices
and current purchasing power parity for the reference year.
Rank Country Median
1  Luxembourg 34,821 2010
2  Norway 32,820 2010
3  Switzerland 31,493 2009
4  United States 29,056 2010
5  Canada 28,914 2010
6  Austria 28,089 2010
7  Australia 27,946 2010
8  Denmark 26,744 2010
9  Netherlands 25,715 2010
10  Germany 25,569 2010
11  Finland 24,778 2010
12  Belgium 24,709 2010
13  Sweden 24,614 2010
14  Iceland 24,610 2010
15  France 24,221 2010
16  United Kingdom 24,047 2010
17  South Korea 23,994 2011
18  New Zealand 23,444 2009
19  Italy 21,894 2010
20  Ireland 21,804 2009
21  Japan 21,410 2009
22  Slovenia 20,385 2010
23  Spain 18,736 2010
24  Israel 16,957 2010
25  Greece 16,570 2010
26  Czech Republic 15,348 2010
27  Slovakia 14,473 2010
28  Portugal 14,064 2010
29  Poland 13,414 2010
30  Estonia 11,564 2010
31  Hungary 10,319 2009
32  Chile 9,577 2011
33  Turkey 7,944 2009
34  Mexico 5,132 2010



From The Story of the American Recovery in 15 charts 
5/8/14 The Washington Post



Power to the People


  federal minimum wage over time