WAGE DETERMINATIONPertemuan 21

Matakuliah : J0114-Teori EkonomiTahun : 2009

Bina Nusantara University 3

Labor Wages and Earnings

• Wage Rate• Nominal Wage• Real Wage• General Level of Wages• Role of Productivity

– Plentiful Capital– Access to Abundant Natural

Resources– Advanced Technology– Labor Quality– Other Factors

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Purely Competitive Labor Market

• Market Demand for Labor• Market Supply for Labor• Labor Market Equilibrium• MRP = MRC Rule

Graphically…

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Purely Competitive Labor Market

Wag

e R

ate

(Do

llar

s)

Wag

e R

ate

(Do

llar

s)

($10)WC

($10)WC

Labor Market Individual Firm

Quantity of Labor Quantity of Labor

QC

(1000)

0 0

D=MRP(∑ mrps) d=mrp

qC

(5)

s=MRC

S

e

c

b

a

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Monopsony Model

• Monopsony• Upward-Sloping Labor Supply to Firm• MRC Higher Than the Wage Rate• Equilibrium Wage and Employment

Graphically…

O 26.1

G 26.2

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Monopsony ModelW

age

Rat

e (D

olla

rs)

Quantity of Labor

0

S

MRP

MRC

c

b

aWc

Wm

Qm Qc

Examples of Monopsony Power

Monopsonistic Labor Market

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Three Union Models

• Demand Enhancement Model– Increase Product Demand– Increase Productivity– Alter the Price of Other Inputs

Wag

e R

ate

(Do

llar

s)

Quantity of Labor

Wu

Qc Qu

Wc

D1

D2

S

IncreaseIn Demand

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Three Union Models

• Exclusive or Craft Union Model– Restricted Immigration– Reduced Child Labor– Encouraged Compulsory Retirement– Shorter Hour Workweek– Exclusive Unionism– Occupational Licensing

Graphically…

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Three Union Models• Exclusive or Craft Union ModelW

age

Rat

e (D

olla

rs)

Quantity of Labor

D

S1

Qc

Wc

S2

Wu

Qu

DecreaseIn Supply

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Three Union Models• Inclusive or Industrial Union

Model– Inclusive Unionism

Wag

e R

ate

(Do

llars

)

Quantity of Labor

D

S

Qc

Wc

Wu

Qu Qe

a be

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Three Union Models

• Wage Increases and Unemployment• Average 15% Higher Wages• Reduced Employment Levels

Corrected by:– Growth– Elasticity

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Bilateral Monopoly• Indeterminate Outcome• Desirability of Bilateral Monopoly

Wag

e R

ate

(Do

llars

)

Quantity of Labor

D=MRP

S

Qc

Wc

Wu

Qu=Qm

MRC

Wm

a

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Minimum Wage

• Case Against the Minimum Wage• Case For the Minimum Wage• State and Locally Set Rates• Evidence and Conclusions

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Wage DifferentialsAverage Annual Wages in Selected Occupations, 2005

SurgeonsAircraft PilotsPetroleum EngineersFinancial ManagersLaw ProfessorsChemical EngineersDental HygienistsRegistered NursesPolice OfficersElectriciansTravel AgentsBarbersRetail SalespersonsRecreation WorkersTeacher AidesFast Food Cooks

$177,690135,040

97,35096,62095,57079,23060,62056,88047,27045,63037,75024,70023,17022,42021,10015,500

Occupation Annual Average Wages

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Wage Differentials

• Marginal Revenue Productivity• Noncompeting Groups

– Ability– Education and Training

•Human Capital

• Compensating DifferencesO 26.2

Bina Nusantara University 170

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

18-24 25-34 35-44 45-54 55-64 65+

Wage DifferentialsEducation Levels and Individual Annual Earnings

EducationalAttainment

An

nu

al E

arn

ing

s (

Th

ou

san

ds

of

Do

llar

s)

Age

Professional Degree

Bachelor’s Degree

Associate’s Degree

High School Diploma

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Wage Differentials

• Marginal Revenue• Market Imperfections

– Lack of Job Information– Geographic Immobility– Unions and Government Restraints– Discrimination