Chapter 28  Wage Determination

I. Labor Productivity and Market Forces Determine Wage Rates
II. Competitive Model
III. Monopsony
IV. Unions
V. Craft Unions vs. Inclusive Industrial Unions
VI. Bilateral Monopoly
VII. Minimum Wage with extensive readings
VIII. Wage Differentials with extensive readings

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I. Labor Productivity and Market Forces Determine Wage Rates
    A. Introduction 
        1. Wage determination is of interest because most people devote
            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 see
             a. Educating the Class of 2030
Changing Education Paradigms from 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.
. Middle Class Wages
Krugman on the Need for Jobs Policies from Naked Capitalism
          2. Worker wage inequality myth exposed lack of skills,
              education not the problem

     E. Labor's Share is Getting Smaller

   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 single 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
     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 is not OK Paul Krugman 1019/14
         1. Some agree

         2. Some disagree

Graph from Market Watch

for Workers

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.



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 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
           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 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)
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
Lets Remember What Unions Have Done for America
           has extensive information and links

      G. 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.

Ida M Tarbell crop.jpg

Ida Tarbell and other investigative journalists were called Muckrakers. She exposed Standard Oil Trust. Working for McClure Magazine and other monthly magazines they help educated the public from 1890 to 1929 in what is known as the Progressive Era.

Books also help the education process.

The Jungle exposure of health violations and unsanitary practices in the early 20th century American meatpacking industry.
The Octopus exposed government corruption

V. Craft Unions vs. Inclusive Industrial Unions
    A. Craft Unions
Organized in 1886 by Samuel Gompers as 
            the American Federation of Labor - AFL
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 AFL because mass 
          production workers needed a different type organization. 
      2.The decline and resurgence of the u s auto industry 05 08 15

         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?

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

Down half a point to 11.3% since 2011 because of public sector decrease,

 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
           the corporate monopoly Trusts that
           control railroad rates and routes 
           and thus destroyed small towns 
           and farms.   

    D. Bilateral monopoly from Wiki














Economist Magazine

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The Economist Magazine p58, 5/26/12


Editors Note: Work rules keep employment in Europe high at the cost of less efficiency. German
politicians fought the unions and saved the economy but lost reelection in 2005.

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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).
             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. 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
           11/27/13 Bloomberg
       I . Case study San-Jose Hiked minimum wage 4/14/14







J.  Living wage calculator based on typical expenses in specific locations from MIT. Source

The Economist Magazine 2/16/13

The Economist 11/24/12

       J. Additional Minimum Wage 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. Almanac of Policy Issues
                 b. Wikipedia
                 c. U.S. Minimum Wage History,
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 Power of-Minimum Wage 8/14
Employment Elasticity to Minimum Wage 3/15



Economist Magazine11/20/10

Some Think Our Flat World is the Cause.

VIII. Wage Differentials

         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 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.  Outside reading Pay-for-Performance Doesn’t Always Pay Off

         H. reported that 2014 WS bonuses of $28.5 were almost twice the
              earnings of the 1.03 million full time workers earning the  Federal minimum
              wage. 3/27/15 The Week magazine.


        G. The economic gain from investing in education is going down.
             1. Over the last 20 years, the need for above average college graduate
                 has increased from about 20% to about 23%.
             2. There was a slight over supply until 1995 when a dramatic increase
                 in college graduates made the over supply substantial.
             3. The mean household income peaked in 2000 and since, has dropped
                 almost 10%.
             4. The decrease is more substantial than it appears.
                 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.


5/8/15 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 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

New York police violently attacking unemployed workers in Tompkins Square Park, 1874




College Degree holders
up about 30%







College Earnings Down
almost 15% Supply Up,
Price (wages)  down!

IX. Worldwide Differences

Comparing Payroll Tax


Europe Tries to Limit Socialism's
Unintended Consequences

Hours Worked Have Been Dropping


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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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