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15-1Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 8e, by Jackson & McIverBy Muni Perumal, University of Canberra, Australia
Chapter 15
Wage determination
15-2Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 8e, by Jackson & McIverBy Muni Perumal, University of Canberra, Australia
Learning objectives• Understand the forces underlying the general
level of wage rates in Australia• See how wage rates are determined,
in particular, labour markets, by presenting several representative labour market models
• Analyse the impact of unions on the structure and level of wages
• Discuss the economic effects of minimum wages
• Explain wage differentials
15-3Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 8e, by Jackson & McIverBy Muni Perumal, University of Canberra, Australia
Wages• Wages rates
– Price paid for the use of labour
• Earnings– Wage rates and the number of hours or weeks
of labour service supplied in the market
15-4Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 8e, by Jackson & McIverBy Muni Perumal, University of Canberra, Australia
Nominal vs real wages• Nominal wages
– Amount of money received by an individual or group during some period of time
• Real wages– Amount of goods and services an individual or
group can purchase with their nominal incomeduring some period of time
15-5Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 8e, by Jackson & McIverBy Muni Perumal, University of Canberra, Australia
General level of wages• The general or average level of wages is a
composite index encompassing a wide range of specific wage rates
• Role of productivity– Partly determines the demand for labour– The greater the productivity of labour, the higher
the demand for it
15-6Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 8e, by Jackson & McIverBy Muni Perumal, University of Canberra, Australia
Productivity in AustraliaLabour in Australia is highly productive. Why?• High quality and quantity of capital
– The average Australian worker is assisted by $188 644 of investment capital
• Abundant natural resources– Natural resources are very abundant in relation
to the size of the labour force
• Technological advances– The level of technological advance is generally
higher in Australia than in many other countries
15-7Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 8e, by Jackson & McIverBy Muni Perumal, University of Canberra, Australia
Productivity in Australia (cont.)Labour in Australia is highly productive. Why?• Labour quality
– Superior health, vigour, education and trainingof Australian workers
• Other factors– Management flexibility– Stable socio-political environment– Size of domestic and overseas markets enables
firms to realise economies in production
15-8Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 8e, by Jackson & McIverBy Muni Perumal, University of Canberra, Australia
Output per hour and average hourly earnings
15-9Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 8e, by Jackson & McIverBy Muni Perumal, University of Canberra, Australia
Wage determination in competitive labour market
Characteristics of a purely competitive labour market:• Many firms competing for labour• Many qualified workers acting as independent
suppliers• Both firms and workers are ‘price takers’; that is,
‘wage takers’• MRC is constant and equal to resource price• Individual firm will find it profitable to hire up
to the point at which the going wage rate is equal to MRP of labour
15-10Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 8e, by Jackson & McIverBy Muni Perumal, University of Canberra, Australia
Wage determination in competitive labour market (cont.)
• Market demand for labour– Obtained by summing horizontally the labour
demand curves of individual firms
• Market supply of labour– Supply curve is up-sloping: higher wages are
necessary for more labour
15-11Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 8e, by Jackson & McIverBy Muni Perumal, University of Canberra, Australia
Wage determination in competitive labour market (cont.)
• Market equilibrium– MRC is constant and equal to resource price– Individual firm will find it profitable to hire up to the point
at which the going wage rate is equal to MRP of labour
15-12Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 8e, by Jackson & McIverBy Muni Perumal, University of Canberra, Australia
Supply & demand for labour: competitive labour market
Wag
e ra
te (
do
llar
s)
Quantity of labour Quantity of labourIndividual firm Market
D
D = MRP
( of MRPs)
S
S = MRCWc Wc
($6)($6)
d
d
MRP curve
qc Qc
($6)($6)
15-13Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 8e, by Jackson & McIverBy Muni Perumal, University of Canberra, Australia
Wage determination: monopsony
• Monopsony is a market in which there is only one buyer of a resource
• The firm dominates employment of a particular type of labour
• Immobile or inflexible labour type• Firm is a ‘wage maker’
15-14Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 8e, by Jackson & McIverBy Muni Perumal, University of Canberra, Australia
Wage determination: monopsony (cont.)
• Characteristics– Up-sloping labour supply curve– MRC exceeds wage rate
• Equilibrium– Up to point where MRC = MRP
• Results– Lower wages, employment levels and output
15-15Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 8e, by Jackson & McIverBy Muni Perumal, University of Canberra, Australia
Monopsonistic labour market
Wa
ge
ra
te (
do
llars
)
S
Quantity of labour
MRCMRP
MRP
Qm
Wm
b
C
aWc
Qc
The competitiveThe competitivesolution wouldsolution would
result in a higherresult in a higherwage and greaterwage and greater
employmentemployment
15-16Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 8e, by Jackson & McIverBy Muni Perumal, University of Canberra, Australia
Wage determination: monopsonyComplication — monopoly power in product market
• Restrictive monopoly or oligopoly – Resource demand curve is depressed
– Even lower wages, and fewer employment • Progressive monopoly
– Resource demand curve shifts to the right– Increases labour volumes
15-17Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 8e, by Jackson & McIverBy Muni Perumal, University of Canberra, Australia
Supply imperfections: some union models
• Unions– Basic objective: increase wage rates. How?
• Three alternative models1. Increasing the demand for labour
2. Exclusive or craft unionism Exclusive unionism — higher wages by excluding
workers from the union and therefore the supply of labour
Occupational licensing — law prohibits people from practising a trade if they do not meet specific requirements
15-18Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 8e, by Jackson & McIverBy Muni Perumal, University of Canberra, Australia
D2
Demand-enhancement union model
Wag
e ra
te (
do
llar
s)
Q of labour
D
W1
Q1
S
Q2
W2
15-19Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 8e, by Jackson & McIverBy Muni Perumal, University of Canberra, Australia
Exclusive or craft union model
Wag
e ra
te (
do
llar
s)
Q of labour
D
W1
Q1
S1
W2
Q2
...restrictive membership policies
S2
...restrictinglabour supply of the economy as a whole
15-20Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 8e, by Jackson & McIverBy Muni Perumal, University of Canberra, Australia
Supply imperfections: some union models• Unions
– Basic objective: increase wage rates. How?
• Three alternative models3. Inclusive or industrial unionism
– Industrial unions are one where all available workers become members of the union. The unions through control of the supply of labour may impose a wage rate above the competitive equilibrium wage rate
15-21Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 8e, by Jackson & McIverBy Muni Perumal, University of Canberra, Australia
Inclusive unionism model
Wag
e ra
te (
do
llar
s)
S
Quantity of labour
D
Wc
Qc
Wu
...by organising virtually all workers and thereby control of the supply curve for labour
b a
15-22Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 8e, by Jackson & McIverBy Muni Perumal, University of Canberra, Australia
Wage increases and unemployment
• Union efforts to bolster wages may reduce employment
• Reducing unemployment impact– Economic growth– Elasticity of demand for labour
15-23Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 8e, by Jackson & McIverBy Muni Perumal, University of Canberra, Australia
Wage determination:bilateral monopoly
• A market in which there is a single seller and a single buyer of labour
• Big industry and big union• Effect on wages is indeterminable and depends
on the power of the respective parties• Desirability
15-24Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 8e, by Jackson & McIverBy Muni Perumal, University of Canberra, Australia
S
Bilateral monopoly model
Wu
Qu = Qm
Wag
e ra
te (
do
llar
s)
Quantity of labour
D
Wc
…economic theorycannot
determine the actual outcome
Wm
Qc
MRC
MRC
15-25Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 8e, by Jackson & McIverBy Muni Perumal, University of Canberra, Australia
Minimum wages• An anti-poverty device• Case against minimum wages
– Higher wages may force some firms out of business– Increased unemployment– Lower wages are better than no wages
• Case for minimum wages– Higher wages may cause a monopsonist to stop
restricting employment– Increased productivity
15-26Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 8e, by Jackson & McIverBy Muni Perumal, University of Canberra, Australia
Minimum wages (cont.)• Empirical evidence
– Evidence from overseas studies suggests that periodic increase in the minimum wage are followed by decline in employment in affected industries
– Those in employment tend to receive higher wages and tend to escape poverty
– Overall result: a mixed and ambiguous one
15-27Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 8e, by Jackson & McIverBy Muni Perumal, University of Canberra, Australia
Wage differentials: causes• Heterogeneity of workforce
– Ability– Education– Training
• Variety of attractiveness of jobs• Market imperfections
15-28Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 8e, by Jackson & McIverBy Muni Perumal, University of Canberra, Australia
Wage differentials: causes (cont.)• Non-competing groups
– Ability– Investing in human capital: education
and training
• Compensating differences
15-29Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 8e, by Jackson & McIverBy Muni Perumal, University of Canberra, Australia
Educational attainment, age and average weekly earnings of full-time workers
15-30Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 8e, by Jackson & McIverBy Muni Perumal, University of Canberra, Australia
Wage differentials: causes (cont.)
• Imperfection in labour market– Geographical immobilities– Institutional immobilities– Sociological immobilities in the form of discrimination
15-31Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 8e, by Jackson & McIverBy Muni Perumal, University of Canberra, Australia
Next chapter:
Rent, interest and profits