AGENDA Tues 12/1

• QOD #37: Work with benefits

• Wage Determination

• Monopsony

• Unions (Effect of Unions wksht)

• HW: Read pp 273-282 Q #7,9

LO1 13-1

QOD #37: Work with Benefits

Workers are compensated by firms with “benefits” in addition to wages

and salaries. The most prominent benefit offered by many firms is health

insurance. Suppose that in 2000, workers at one steel plant were paid

$20 per hour and in addition received health benefits at the rate of $4

per hour. Also suppose that by 2010 workers at that plant were paid $21

per hour but received $9 in health insurance benefits.

a. By what percentage did total compensation (wages plus benefits) change at

this plant from 2000 to 2010? What was the approximate average annual

percentage change in total compensation?

b. By what percentage did wages change at this plant from 2000 to 2010?

What was the approximate average annual percentage change in wages?

c. If workers value a dollar of health benefits as much as they value a dollar of

wages, by what total percentage will they feel that their incomes have risen

over this time period? What if they only consider wages when calculating

their incomes?

d. Is it possible for workers to feel as though their wages are stagnating even if

total compensation is rising

10-2

QOD #37: Work with Benefits a. By what percentage did total compensation (wages plus benefits) change at

this plant from 2000 to 2010? What was the approximate average annual

percentage change in total compensation?

a. Compensation increased by 25%. The average annual percentage change was 2.5%.

b. By what percentage did wages change at this plant from 2000 to 2010?

What was the approximate average annual percentage change in wages?

a. Wages increased by 5%. The average annual percentage change was 0.5%.

c. If workers value a dollar of health benefits as much as they value a dollar of

wages, by what total percentage will they feel that their incomes have risen

over this time period? What if they only consider wages when calculating

their incomes?

a. If they consider all benefits together, they feel their incomes increased by 25%. If they only

consider wages, they feel their incomes increased 5%.

d. Is it possible for workers to feel as though their wages are stagnating even if

total compensation is rising?

a. Yes, workers may feel their wages are stagnating even when total compensation is rising, if

they do not consider the value of benefits as part of their wages

10-3

Labor, Wages, and Earnings

• Wages

• Price paid for labor

• Direct pay plus fringe benefits

• Wage rate

• Nominal wage

• Real wage-purchasing power

• General level of wages-see p.267

LO1 13-4

Role of Productivity

• Labor demand depends on

productivity

• U.S. labor is highly productive

• Plentiful capital

• Access to abundant natural

resources

• Advanced technology

• Labor quality

LO1 13-5

Real Wages and Productivity

• Long-run trend of average real

wages in the U.S.

Real

Wag

e R

ate

(D

ollars

)

Quantity of Labor

D1900

S1900

D1950

D2000 D2020

S1950

S2000

S2020

LO1 13-6

Real Wages and Productivity

LO1 13-7

Competitive Labor Market

• Market demand for labor

• Sum of firm demand

• Example: carpenters

• Market supply for labor

• Upward sloping

• Competition among industries

• Labor market equilibrium

• MRP = MRC rule

LO2 13-8

($10) WC

($10) WC

Wa

ge

Ra

te (

Do

lla

rs)

Labor Market

Quantity of Labor

Wa

ge

Ra

te (

Do

lla

rs)

Individual Firm

Quantity of Labor

QC

(1000)

0 0

d=mrp

qC

(5)

s=MRC

Competitive Labor Market

LO2

D=MRP (∑ mrp’s)

S

e b

a

c

13-9

Monopsony Model

• Employer has buying power

• Characteristics

• Single buyer

• Labor immobile

• Firm “wage maker”

• Firm labor supply is upward sloping

• MRC higher than wage rate

• Equilibrium

LO3 13-10

• Examples of monopsony power-see p.272

Monopsony Model

Wa

ge

Ra

te (

Do

lla

rs)

Quantity of Labor

0

S

MRP

MRC

c

b

a Wc

Wm

Qm Qc

LO3 13-11

Monopsony Power

• Maximize profit by hiring smaller number of workers

• Examples of monopsony power-rare in the U.S.

• Nurses-skills not easily transferrable-small town?

• Professional Athletes-player drafts-teams aren’t

competing to hire.

• Three union models

LO3 13-12

Demand Enhancement Model

• Union model

• Increase product demand

• Alter price of other inputs

Wa

ge

Ra

te (

Do

lla

rs)

Quantity of Labor

Wu

Qc Qu

Wc

D1

D2

S

Increase

In Demand

LO4 13-13

Wa

ge

Ra

te (

Do

lla

rs)

Quantity of Labor

restrictive membership,

occupational licensing (plumbers, doctors)

D

S1

Qc

Wc

S2

Wu

Qu

Decrease

In Supply

Craft Union Model

LO4 13-14

Industrial Union Model

• Inclusive unionism-ALL WORKERS

• Auto and steel workers

Wa

ge

Ra

te (

Do

lla

rs)

Quantity of Labor

D

S

Qc

Wc

Wu

Qu Qe

a b e

LO4 13-15

Bilateral Monopoly Model

• Monopsony and inclusive unionism

• Single buyer and seller

• Not uncommon

• Indeterminate outcome

• Desirability

LO4 13-16

Bilateral Monopoly Model

LO4

Wa

ge

Ra

te (

Do

lla

rs)

Quantity of Labor

D=MRP

S

Qc

Wc

Wu

Qu=Qm

MRC

Wm

a

13-17

The Minimum Wage Controversy

• Case against minimum wage

• Case for minimum wage

• State and locally set rates

• Evidence and conclusions

LO5 13-18

• Differences across occupations

• What explains wage differentials?

• Marginal revenue productivity

• Noncompeting groups

• Ability

• Education and training

• Compensating differences

LO5

Wage Differentials

13-19

Wage Differentials

LO5 13-20

Wage Differentials

• Workers prevented from moving to

higher paying jobs

• Market imperfections

• Lack of job information

• Geographic immobility

• Unions and government restraints

• Discrimination

LO5 13-21

Pay for Performance

• The principal-agent problem-shirking v. not shirking (utility)

• Incentive pay plan

• Piece rates

• Commissions or royalties

• Bonuses, stock options, and profit sharing

• Efficiency wages

• Negative side-effects

LO6 13-22