Wage Determinitation

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Chapter 28 Wage Determination
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Editors Notes     A. McConnell Economics Books, including the 18th edition,
are one of many sources of material included in this chapter.
    B. Our Current Events Internet Library has an interesting economics section.

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   I. Introduction
       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.

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

III. 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 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.

I. In Defense of Sweatshops

IV. Monopsony model
      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.

Wage Rate	Workers Hired	Total Costs	Marginal Resource Cost	Demand for Workers
6	1	6	6	4
7	2	14	8	3
9	3	27	13	2
12	4	48	21	1
C. Economic analysis 1. Pure competition results in more workers being hired at a higher wage rate 2. W_M < W_PCand Q_M < Q_PC D. Oligopsony, a few buyers, often yields similar results

V. Union models
      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 (MRP_L) 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 (featherbedding)
              e. Require closed shops which limit hiring to union members
               f. Require union shops requiring 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. Set up the National Labor Relations Board to investigate/stop unfair labor practices
     D. Taft-Hartley Act of 1947 decreased union power.
         1. Outlawed closed shops
         2. Allowed state right-to-work-laws which to date have made union shops requiring eventual union membership
              illegal in 21 states (Right to Work States)
         3. Outlawed featherbedding: (keeping positions even though there is no need)
         4. Outlawed secondary boycotts (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


E. Exclusive crafts unions	F. Inclusive industrial union
1. Organized in 1886 by Samuel Gompers as the American Federation of Labor (AFL) a. Each trade was autonomous. b. Union was not political.	1. The Congress 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 increase wages
	Have American CEO's Created an Exclusive Craft Union?

In 1955 the AFL and CIO merged into the AFL-CIO. Unions: Good or Bad? from the Motley Fool

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.

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.
        D. Continue reading "The Economic Debate over Minimum Wage Effects" is from the blog Econbrowser.
        E. Econ Concepts in 60 Seconds Video on Labor Market and Minimum Wage Review

	Recent Minimum Wage Rates ($)		CPI-U	Real Minimum Wage
	1974	2.30	49.3	4.67
	1978	2.65	65.2	4.06
	1981	3.35	90.9	3.68
	1990	3.80	130.7	2.91
	1991	4.25	136.2	3.12
	1997	5.15	160.5	3.21
	2007	5.85
	2008	6.55
	2009	7.25
F. Additional Material 1. Many states have departed from the federal minimum wage. 2. Washington has the highest minimum wage in the country at $7.93 as of January 1, 2007.
3. For a vast amount of material on the minimum wage visit a. Almanic of Policy Issues, b. Wikipedia c. U.S. Minimum Wage History, d. Federal Minimum Wage Increase for 2007, 2008, and 2009 plus 2010 State Minimum ...

VIII. Wage Differential
         A. Wages are determined by marginal revenue product so entertainers who sell the most tickets
               make the most money.
         B. Tutor2u - wage differentials between occupations
         C. Work requirements differ so many workers with different ability and education form
              noncompeting 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. Outside reading Pay-for-Performance Doesn�t Always Pay Off

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