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Wage Determination - PPT Lecture - 19-4-2020

This document discusses wage determination in labor markets. It describes how wages are determined through supply and demand in competitive labor markets, with firms and workers being price takers. It also discusses monopsony labor markets, where a single firm has some power to set wages. In these cases, the firm will employ fewer workers than under perfect competition and pay them a wage lower than their marginal revenue product, to maximize profits. Factors like labor mobility and the number of competing employers can influence the degree of monopsony power.

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Maria Ali Zulfiqar
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412 views11 pages

Wage Determination - PPT Lecture - 19-4-2020

This document discusses wage determination in labor markets. It describes how wages are determined through supply and demand in competitive labor markets, with firms and workers being price takers. It also discusses monopsony labor markets, where a single firm has some power to set wages. In these cases, the firm will employ fewer workers than under perfect competition and pay them a wage lower than their marginal revenue product, to maximize profits. Factors like labor mobility and the number of competing employers can influence the degree of monopsony power.

Uploaded by

Maria Ali Zulfiqar
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPT, PDF, TXT or read online on Scribd
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Chapter 15

Wage Determination
Labor, Wages, and Earnings
• Wages: Price paid for labor
• Direct pay plus fringe benefits
• Wage rate: Price paid per unit of labor services
• Nominal wage vs Real wage: A nominal wage is the amount of
money received/hour, day, or year. A real wage is the quantity of goods &
services a worker can obtain with nominal wages; real wages reveal the
“purchasing power” of nominal wages
• General level of wages: Wages differ among nations, regions,
occupations, and individuals. It is a wide range of different wage rates. It
includes the wages of bakers, barbers, brick masons, and brain surgeons, get
average.

15-2
LO1
Role of Productivity
• Labor demand depends on productivity: the greater the productivity of labor, the greater
is its demand.
• If the total supply of labor is fixed, then the stronger the demand for labor, the higher is
the average level of real wages.
• U.S. labor is highly productive (Reasons for High Productivity)
• Plentiful capital
• Access to abundant natural resources
• Advanced technology
• Labor quality: The health, vigor, education, and training of workers in advanced
economies generally superior to those in developing nations
• Other factors: (a) Efficiency & flexibility of Mgt (b) a business, social, and political
environment focusing production & productivity (c) vast market size (d) Increase
production specialization under free trade

15-3
LO1
Competitive Labor Market
What determines the wage rate paid for a specific type of labor? Demand
and supply play role. Competition
•Numerous firms compete with one another in hiring a specific type of labor.
•Each of many qualified workers with identical skills supplies that type of labor.
•Individual firms and individual workers are “wage takers” since neither can exert any control over
market wage rate.
•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 15-4
Competitive Labor Market

Labor supply and labor demand in (a) a purely competitive labor market and (b) a
single
LO
competitive firm.
15-5
Labor use decision

MRPL = MRC ……………5 workers in above figure


LO 15-6
Monopsony Model

• Employer has buying power


• Characteristics
• Single buyer
• Labor immobile (have few emp. options-
geographically or technically (new skill))
• Firm is a “wage maker”
• Upsloping labor supply to firm
• MRC higher than wage rate
• Equilibrium

15-7
LO3
Degrees of Monopsony power

• In pure monopsony such power is at its


maximum because only a single employer hires
labor in the labor market.
• In other cases three or four firms may each hire
a large portion of the supply of labor in a
certain market and so have some monopsony
power. Moreover, if they tacitly or openly act in
concert in hiring labor, they greatly enhance
their monopsony power.
LO 15-8
Up-sloping labor supply

MRC higher than wage rate


15-9
Equilibrium in Monopsony

To maximize profit, the


monopsonist will employ the
quantity of labor Qm in Figure,
because at that quantity MRC
and MRP are equal (point b).

Next he determines how


much it must pay to attract
these Qm workers. From S,
point c, it sees that it must
pay wage rate Wm.

LO 15-10
Monopsony Power

• Maximize profit by hiring smaller number of


workers
• Examples of monopsony power
• Nurses
• Professional Athletes
• Teachers
• Three union models

15-11
LO3

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