Wage Determination
Building on the resource demand analysis of the previous chapter, this chapter provides a detailed supply and demand analysis of wage determination in a variety of possible labor market structures. Though the analysis may seem rigorous, it is little more than an application of supply and demand tools.
A discussion of the general level of real wages opens the chapter. The critical link between labor productivity and real wages merits emphasis as a theoretical and policy issue.
The section on wage determination in particular labor markets is the heart of the chapter. Competitive, monopolistic, unionized, and bilateral monopoly market models are examined. Discussion of the effectiveness of unions in raising wages, and the complex issue of minimum wage laws follow.
Wage differentials are explained by the differences among worker characteristics, job characteristics, and lack of worker mobility. The chapter concludes with a discussion of pay schemes that link earnings to worker performance, their contributions to efficiency, and possible negative side effects
Lecture Notes
Wages refer to the price paid for the use of labor.
- Labor may be workers in the popular sense of the terms blue-collar and white-collar workers.
- Labor also refers to professional people and owners of small businesses, in terms of the labor services they provide in operating their businesses.
Wages may take the form of bonuses, royalties, commissions, and salaries, but in this text the term “wages” is used to mean wage rate or price paid per unit of labor time.
It is important to distinguish between nominal and real wages.
- Nominal wages are the amount of money received per hour, per day, per week and so on.
- Real wages are the purchasing power of the wage, i.e., the quantity of goods and services that can be obtained with the wage. One‘s real wages depend not only on one‘s nominal wage but also on the price level of the goods and services that will be purchased.
- Example: If nominal wages rise by 10 percent and there is a 5 percent rate of inflation, then the real” wage rose only by 5 percent.
- In this discussion, it is assumed that the price level is constant, and so the term “wages” is used in the sense of “real wages.”
The general level of wages differs greatly among nations, regions, occupations, and individuals.
