Chapter 28 Wage Determination
A. Wage determination is of interest because most people devote much
of their time to wage-earning activities.
B. Wage earners include both blue and white collar workers and professionals.
Labor's Share is Getting Smaller
II. Labor productivity and market forces determine wage rates
A. Factors affecting labor productivity
1. Quality (health, education, etc.) of the work force
2. Quantity and quality of capital supporting labor
3. Use of technology
4. Management efficiency
5. Business, social and political climate
6. Cost and availability of natural resources
B. 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.
C. Krugman on the Need for Jobs Policies from Naked Capitalism
D. Middle Class Wages
1. The Myth of the Great Wage Decoupling 3/6/14
2. Worker wage inequality myth exposed lack of skills, education not the problem
A. Many buyers and sellers, from a few to tens-of-thousands of workers and
a proportionate number of buyers (companies).
B. No single company has high enough demand to affect wages (price).
C. Workers (supply) act independently.
D. Industry supply is upsloping 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
IV. Monopsony Model
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
D. Economic analysis
1. Pure competition results in more workers being hired
at a higher wage rate
2. WM < WPC and QM < QPC
E. 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.
V. Union models
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 licenses and apprenticeships
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
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. Set up the National Labor Relations Board 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 members.
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. Outlawed Secondary boycotts or sympathy strike (companies the
employer does business with also feel a boycott)
E. Labor Day and the low-wage future is a 10 minute video on the history
of Labor Day and some current data 9/7/09
F. 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.
From Page 60 of the April 24, 2010 edition of The Economists. For the complete article read You ain't seen nothing yet.
from seekingalpha 4/23/13
The downward pressure on compensation is connected to the rapid erosion of labor-union power. In 2012, unions lost 400,000 members, or 2.7 percent, and their representation in the labor force fell to 9.3 percent, from 9.6 percent in 2011 and more than 25 percent in the 1960s. In the private sector, unionization fell to 6.3 percent, with the sharpest declines in manufacturing and construction.
More states are passing right-to-work laws, which allow employees in unionized workplaces to opt out of paying union dues. In the past year, private-sector employees in right-to- work states earned 9.8 percent less than workers in other states. Manufacturing jobs pay 7.4 percent less in right-to-work states. On the other hand, the number of jobs in such states grew 4.9 percent in the past three years, compared with 3.9 percent in non-right-to-work states.
Municipal governments are under pressure to cut costs. Local tax collection is subdued because of earlier declines in property assessments and taxes, which account for 79 percent of revenue. State tax collections have revived, thanks to increases in corporate and personal income taxes and in sales taxes. Yet many states still face budget problems because of the fading effects of the federal stimulus enacted in 2009, which was used for infrastructure projects and to preserve teachers’ jobs. In addition, the Medicaid costs borne by the states are ballooning, and temporary taxes instituted during the recession are expiring. Vastly underfunded defined-benefit pensions are also fueling state and local government retrenchment.
is not the cause of stagnate wages in the US and Germany.
Do Private Sector Unions Still Have a Future in the US
The Washington Post By Brad Plumer, 6/13/13
Union movement misses big opportunity to halt its decline
|Wages are losing the battle with profits|
G. Craft Unions
|H. Inclusive industrial union|
1. Organized in 1886 by
AFL- American Federation of Labor AFL
a. Each trade was autonomous.
b. Union was not political.
of Industrial Organizations (CIO) was organized
in 1936 by John L. Lewis who broke with AFL because mass
production workers needed a different type organization.
|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. Control supply of
workers and emphasized collective bargaining to
Have American CEO's Created an Exclusive Craft Union?
May, 2011 The Rise of the McWorker
Down half a point to 11.3% since 2011 because of public sector decrease,
In 1955the AFL and CIO merged into the AFL-CIO.
Unions: Good or Bad? from the Motley Fool
A. Monopsony vs. union (monopoly)
B. Could the net result be close to that
of a competitive market?
1. The answer depends upon
2. If bargaining power is split equally,
wages paid and quantity hired
could be similar to that of pure
C. THEODORE ROOSEVELT took on
the corporate monopoly Trusts that
control railroad rates and routes
and thus destroyed small towns
Support this site by shopping at amazon.com.
The Economist Magazine p58, 5/26/12
Editors Note: Work rules keep employment in Europe high
at the cost of less efficiency. German
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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).
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.
D. Econ Con in 60 Sec Vid-Labor Market, Min Wage Review
E. "The Economic Debate over Minimum Wage Effects"
is from the blog Econbrowser.
F. Minimum Wage by State
G. What would happen if fast food workers got a big raises
8/2/13 Bloomberg's Business Week
H. What higher minimum wage does for workers/economy
I . Case study San-Jose Hiked minimum wage 4/14/14
J. Living wage calculator based on typical expenses in specific locations from MIT. From http://fivethirtyeight.com/datalab/what-do-mcdonalds-workers-really-make-per-hour/.
The Economist Magazine 2/16/13
The Economist 11/24/12
H. Additional Material
1. The State of Working America