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Chapter
28 Wage
Determination
Editors Notes
A.
McConnell Economics Books, including the
18th edition, |
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I. Introduction
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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 |
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III. Competitive model

IV. Monopsony model
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| Wage Rate |
Workers Hired |
Total Costs |
Marginal Resource Cost |
Demand for Workers |
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| 6 | 1 | 6 | 6 | 4 | |
| 7 | 2 | 14 | 8 | 3 | |
| 9 | 3 | 27 | 13 | 2 | |
| 12 | 4 | 48 | 21 | 1 | |
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C. Economic analysis D. Oligopsony, a few buyers, often yields similar results
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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 (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 (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
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| 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 | |
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Have American CEO's Created an Exclusive Craft Union? |
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In 1955 the AFL and CIO merged into the AFL-CIO.
Unions: Good
or Bad? from the Motley
Fool
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| 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. |
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VII. Minimum wage
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Recent Minimum Wage Rates ($) |
CPI-U | Real Minimum Wage |
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| 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 | ||||
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F. Additional Material |
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3. For a vast amount of material on the minimum wage
visit |
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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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