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Chapter 28  

Wage Determination


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Economists Critique America's Educational System

 I. Introduction 
   A. Wage determination is of interest because most people devote
          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. 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
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.
     H. 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.
     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
Amazons 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


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 
              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.

U.S. Strikes, Lockouts Remained Near Record Lows in 2010  2/8/11

Is the Supreme Court Killing Unions 7/11/14









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


Labor Power

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.


Productivity is not the cause of stagnate wages in the US and Germany.

Economist Magazine


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
Economist Magazine 2/22/14

Wages are losing the battle with profits


G. Craft Unions

H. Inclusive industrial union
1. Organized in 1886 by Samuel Gompers as the 
    AFL- 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?

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.   














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 th 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. From

The Economist Magazine 2/16/13

The Economist 11/24/12

       J. 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,
2010 State Minimum Wages
           4. Germany has a marginal employment
                rather tan a minimum wage
           5 Living wage by state from MIT

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. Study Reduces Minimum Wage Fears

7. Job Polarization
8. Indentured servant we have come a long way
9. Buying Power of-Minimum Wage Varies by State 8/14
How to Shorten the working Week

Economist Magazine11/20/10

Some Think Our Flat World
is the Cause.

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 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

        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.
Extra Reading
1. Has  Purely Competitive Adjustment Causing a New Normal for Wage Gains?
From chapter 23.
2. Comprehensive immigration bill disaster for US workers The Economic Populist
3. Tech companies lobbying immigration USA Today 4/30/13
4 Have and Have not: New study shows just how slow it is to change social class

5. Kevin Erdmann on capital income, rental income and labor compensation
    with links it is extensive and may be read after the next chapter.

College Degree holders
 up about 30%


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


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.
















low wage jobs

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


ssa average median wage 2013labor-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








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