Chapter 28  Wage Determination 
   One-Page Quick Review-Chapter 28 may help with exams.   Updated 7/14/17    

Index
I. Labor Productivity and Market Forces Determine Wages

II. Competitive Model
III. Monopsony
IV. Unions
V. Sundry Union Stiff
VI. Exclusive Craft Unions vs. Inclusive Industrial Unions

VII. Bilateral Monopoly
VIII. Minimum Wage
IX. Wage Differentials
X. Worldwide Differences
XI. Education and Income
XII. Analysis of Stagnate Wages

Mark Cuban on the Future of Jobs 22 minute video
Neil Howe Explains Investing in a Trump Market and Bannon's Affect 43 minute video

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

Review worker quality, management, technology
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 richmondfed.org/

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

H. Wage Growth For All Are Coming Back

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
    I. Review
many independent buyers and
    sellers with up sloping supply curve

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
    
F.
Monopsony Model
        G. Readings
             1. Amazon.com monopsony is not OK Paul Krugman 1019/14
                 a. Some agree
                 b. Some disagree
            2. Monopsony Takes Center Stage - Pro-Market 1/8/17
      3. What monopsony power in the labor market looks like 6/13/17

Graph from Market Watch

Image result for Competitive labor markets

Peabody, Massachusetts 

A. C. Lawrence Leather Co. a factory town circa 1910.[1].[2].

Wage 
Rate 
Workers
Hired
Total 
Costs
Marginal
Resource 
Cost
Demand 
for Workers

I. 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.

J. Review one buyer, independent sellers, lower wages

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

 

 
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
                (featherbedding) 
             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
              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. Secondary boycotts or sympathy strikes where companies
          the employer does business with also feel a boycott)   
    E. Unemployment Risk and Unions 11/16

   
F. Review increase demand for product made and restrict supply of workers  
 
 

 

 

Source Democracy Journal | A Journal of Ideas

 

Child Labor Laws Begin in England

The 1930's Factory Acts "...forbade the employment of children under nine, limited the employment of children under age 13 to nine hours a day and 48 hours a week, and that of children under 18 to 12 hours a day and 69 hours a week. The act also forbade night work for children by restricting the time they could work to the period from 5:30 A.M. to 8:30 P., and required children under 13 to attend school for two hours a day.

The U.S. began to catch up with the 1938 Fair Labor Standards Act

V. Sundry Union Stuff

epi.org/

 Infographic: The State Of The Unions | Statista

Labor Day and the low-wage future is a 10 min video

Labor Day    AFL to-dismiss-dozens-of-its staff 2/28/17

Public vs. Private U.S. Compensation

 

Workers of the World Unit

Sources Congressional Budget Office note total compensation is reported.

Mother Jones

 The Economist

VIII. 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.   
          

Review most analysis on both sides are politically bias

 

   D. Minimum Wage Review Video
  
E. Interesting Studies
         a.
The Overhyped Seattle Minimum Wage Disaster 7/10/17
         b. Always Low Wages? Wal-Mart's Other Choices
         c. The Minimum Wage and McDonald's Welfare

    F. Readings
        1.  "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
        5
Living wage calculator based on typical expenses
           
in specific locations from MIT. Source
       6.  Purchasing Power of Minimum Wage Varies by State
       7
. Employment Elasticity to Minimum Wage
       8. Flat World May be Keeping US Wages Down

 

Who Works For Minimum Wage has much data.

F. 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           
  7.
State buying
  8. Facts About the Minimum Wage
  9. Should Minimum Wage be Increased 5 min video
10.
Raise Wages, Kill Jobs National Employ Law Proje
 
In some states, the cost of living varies widely

Source/

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

businessinsider.com/ 2012-9

 

Raising the minimum wage to $15 by 2024 would lift wages for 41 million American workers Report • By David Cooper • April 26, 2017

 

 

Minimum Wage Tracker lets you see different state policies.
 

G. Seattle's Minimum Wage Experiment is Over See H

"So, almost two years later, how are things working out?  Well, in the Seattle-Bellevue-Everett Metropolitan Division (MD), comprised of King and Snohomish Counties, BLS just reported (on November 30)

"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."

Editor's Note: As of May 2017 the unemployment rate was down to 2.8%. Positive news BUT "The Puget Sound Region has clearly outperformed the nation during the recovery from the Great Recession. Between 2010 and 2015, it added 234,000 jobs. The employment growth rate significantly exceeded the national rate: 2.5 percent per year to 1.7 percent. " Source
H.  New Study Proves Seattle's High MW Punishes Poor

IX. 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. NYT.com 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.

Workers Losing to Owners

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

See US Economic Normality 1945 2015

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


         
'...36.7 percent of people in their prime working years (age 25 to 54) have a bachelor’s degree or higher, while 36.3 percent have a high school diploma or less. " Source

              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.

Review determines by revenue produced and market power of buyers
and sellers

          

Only Graduate Degree Holders Got a Share

Image result for college wage premium

Only the Best Get Paid

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
8.
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
12.
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.

Source and Shifts in the Beveridge Curve - Federal Reserve Bank of New York

 

X. Worldwide Differences

U.S. Top Is Earners High
Low Earners Low

 

High Inequality Results Though Median is Highest

Poor Countries Have High Labor Costs

#17 THE EUROPEAN CRISIS CONTINUES

 

Comparing Payroll Taxes

Source

 

 

Europe Tries to Limit Socialism's Unintended Consequences

>

Hours Worked Have Been Dropping

 

Review difficult to determine given many economies are mixed with differing degrees of socialism.

Image result for Global Economy graphs

 

XI. 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 
http://www.textbooksfree.org/.

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
income
Year[4]
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

wage-growth

Source: economic populist org has much more data.

 

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Data are in United States dollars at current prices
and current purchasing power parity for the reference year.
Rank Country Median
income
Year[4]
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

 

Chart15

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

 

 

Power to the People

unionization.income.distribution

  federal minimum wage over time