What is fair pay?W = P * MP

http://money.cnn.com/2005/04/15/pf/college/starting_salaries/

What is fair pay?W = P * MP

Kevin J. Murphy “Executive Compensation” in O. Ashenfelter and D. Card eds. Handbook of Labor Economics Vol. 3B. 1999

Stock Option

Time

P0

T1

P1

Strike Price

Stock Option

Time

P0

Option “in the money”

T1

P1

Gain

The Economist January 21, 2006

Average CEO Pay, Company with annual revenues of $500 million

Kevin J. Murphy “Executive Compensation” in O. Ashenfelter and D. Card eds. Handbook of Labor Economics Vol. 3B. 1999

Why not offer stock options to everyone?

THE WALL STREET JOURNAL February 24, 2005; 

Page A1

Silicon VolleyAs Tech Matures, Workers File A Spate of Salary Complaints

Limitations on the Market Paradigm

What determines wages within firms?

Internal Labor Markets—Job allocation and compensation decisions within firms

Pay structure set by steps, grades, equal treatment across workers within classifications (clerical, blue collar, professional, …)

Limitations on the Market Paradigm

Pay structure may be partially divorced from market forces

Example California Merit Pay System

Market forces most important at entry level

The Market for Nurses

Frequently alleged that nurses are underpaid relative to their fair value

Growth of Usual Weekly Wages for Physicians, Nurses, Manufacturing Workers, and Private Sector Workers, 1980-2002

Occupation 1980 1992 2006

Physicians 452 1007 1583

Registered Nurses 297 662 1051

Manufacturing 289 470 749

Private Sector 235 364 585

CPI 87 140.3 202.4

Source: U.S. Bureau of Labor Statistics. Employment and Earnings. Various issues. Updated by National Occupational Employment and Wage Estimates

Growth of Usual Weekly Wages for Physicians, Nurses, Manufacturing Workers, and Private Sector Workers, 1980-2006

Percent Growth in Real Wages = 100*{(Wt / Pt ) / (Wt-1/Pt-1)}

Occupation 1980-1992 1992-2006 1980-2002

Physicians 38.2 9.0 50.5

Registered Nurses 38.2 10.0 52.1

Manufacturing 0.8 10.5 11.4

Private Sector -4.0 11.4 7.0

Source: U.S. Bureau of Labor Statistics. Employment and Earnings. Various issues.