Web Chapter A: Wage Determination

Labor Demand Labor is the most important of the resources used by firms Labor demand is a derived demand; thus it depends on the productivity of labor the price of the good or service it helps produce

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Web Chapter AWage DeterminationMcGraw-Hill/IrwinCopyright © 2014 by The McGraw-Hill Companies, Inc. All rights reservedLabor DemandLabor is the most important of the resources used by firmsLabor demand is a derived demand; thus it depends onthe productivity of laborthe price of the good or service it helps produceWCA-*Labor DemandMarginal revenue product (MRP) of labor is the change in a firm’s total revenue when it employs one more unit of labor MRP = Change in total labor Unit change in laborWCA-*Labor Demand1 2 3 4 5 6 7 8$14121086420D = MRPWCA-*Labor DemandMarginal resource cost (MRC) is the change in a firm’s total cost when it employs one more unit of laborMRC = Change in total (labor) cost Unit change in laborWCA-*Labor DemandRule for employing labor MRP = MRCHire additional units of labor up to the point at which labor’s MRP is equal to its MRCWCA-*Market Demand for LaborChanges in product demandChanges in productivityChanges in the prices of other resourcesWCA-*Occupational Employment TrendsRising employmentServicesHealth careComputersDeclining employmentLabor-saving technological changeTextilesWCA-*Employment TrendsOccupation20082018Percentage Increase*Biomedical engineers162872.0Network systems and datacommunications analysts29244853.4Home health aides9221,38350.0Personal and home care aides8171,19346.0Financial examiners273841.2Medical scientists, exceptepidemiologists10915440.4Physicians assistants7510439.0Skin care specialists395437.9Biochemists and biophysicists233237.4Athletic trainers162237.0Source: Bureau of Labor Statistics, www.bls.gov10 Fastest-Growing U.S. Occupations in Percentage Terms, 2008–2018Employment, Thousands of JobsWCA-*Employment TrendsOccupation20082018Percentage IncreaseTextile machine workers3521-40.7Sewing machine operators212141-33.7Postal service workers180125-30.3Lathe operators5641-26.7Order clerks246182-26.1Photographic processingmachine operators5139-24.3File clerks212163-23.4Machine feeders andoffbearers141110-22.2Paper goods machine settersoperators, tenders10381-21.5Computer operators11090-18.6Employment, Thousands of Jobs10 Most Rapidly Declining U.S. Occupations in Percentage Terms, 2008–2018WCA-*Elasticity of Labor DemandEase of resource substitutabilityElasticity of product demandRatio of labor cost to total costEw =Percentage change in labor quantity demandedPercentage change in wage rateWCA-*Market Supply of LaborPurely competitive labor marketMany employers compete for a specific type of laborMany workers with identical skills supply that type of laborIndividual employers are “wage takers”An individual firm’s labor supply is perfectly elastic at the market wage rateFirms use the MRP = MRC rule to determine employment at the market wageWCA-*Market Supply of Labor($10)WC($10)WCWage Rate (Dollars)Labor MarketQuantity of LaborWage Rate (Dollars)Individual FirmQuantity of LaborQC(1000)00d = mrpqC(5)s = MRCD = MRP(∑ mrps)SWCA-*Wage and Employment Determination(1) Units of Labor(2) Wage Rate(3) Total Labor Cost (Wage Bill)(4) Marginal Resource (Labor) Cost0$10$011010$1021020103103010410401051050106106010The Supply of Labor: Pure Competition in the Hire of LaborWCA-*Monopsony ModelEmployer has buying powerCharacteristicsSingle buyerLabor immobileFirm “wage maker”Firm labor supply is upward-slopingMRC higher than wage rateEquilibrium WCA-* Examples of monopsony powerMonopsony ModelWage Rate (Dollars)Quantity of Labor0SMRPMRCcbaWcWmQmQcWCA-*Monopsony PowerMaximize profit by hiring smaller number of workersExamples of monopsony powerNursesProfessional athletesTeachersThree union modelsWCA-*Union ModelsWCA-*Craft Union ModelEffectively reduces supply of laborRestricts immigrationReduces child laborEncourages compulsory retirementEnforces shorter workweekExclusive unionismOccupational licensingWCA-*Wage Rate (Dollars)Quantity of LaborDS1QcWcS2WuQuDecreaseIn SupplyCraft Union ModelWCA-*Industrial Union ModelInclusive unionismAuto and steel workersWage Rate (Dollars)Quantity of LaborDSQcWcWuQuQeabeWCA-*Union ModelsAre unions successful?Wages 15 percent higher on averageConsequences:Higher unemploymentRestricted ability to demand higher wagesWCA-*Wage DifferentialsAverage Annual Wages in Selected OccupationsOccupationAverage Annual WagesSurgeons$225,390Petroleum engineers127,970Financial managers116,970Aircraft pilots115,300Law professors107,990Chemical engineers94,590Dental hygienists68,680Registered nurses67,720Police officers55,620Electricians51,810Travel agents33,950Barbers27,930Recreation workers25,270Retail salespersons25,000Teacher aides24,880Fast-food cooks18,540WCA-*Wage DifferentialsSaDaSbDbScDcSdDdWWWWQQQQ0000WaWbWcWdQaQbQcQd(a)(b)(c)(d)WCA-*Wage DifferentialsDifferences across occupationsWhat explains wage differentials?Marginal revenue productivityNoncompeting groupsAbilityEducation and trainingCompensating differencesWCA-*Wage DifferentialsWCA-*The Minimum Wage ControversyCase against minimum wageCase for minimum wageState and locally set ratesEvidence and conclusionsWCA-*