MICROECONOMIC THEORY – RESOURCE MARKETS (CONTINUED)

LABOR MARKET COMPETITIVE STRUCTURES


The viewpoint of this chapter is how the price of labor or WAGE RATE is determined under

differing of “competition in the labor market”.  We are again talking about different types of

market structure, but in this case it’s market structures in resource markets and not

product markets.  There are four different types of resource market structures

discussed.  They are 1) PURE COMPETITION (employees and employers do not have any

market power), 2).  MONOPSONY (employees have no market power, but employers have

market power), 3)  UNION (employees have market power, but employers have no

market power) and 4) BILATERAL MONOPOLY (both employees and employers have market

power.

IMPORTANT DEFINITIONS:

   Labor – human mental and physical effort used in the production process (includes the

                 labor of small business owners, but not their “normal profit”).

   Wage Rate-  price per hour, per day, per month or per unit of time period paid by

                        employers for labor.  The term wages refers the wage rate.

   Earnings -  amount that labor is paid over time.  Wage rate multiplied by time period.

   Nominal Wage  -  dollar amount of wages paid.

   Real Wage  - quantity of goods/services that a nominal wages can buy.  The

                          purchasing power of the nominal wage.

   General Level Wages  -  Refers to an average of wages by region or country. In year

                                           2000 the U.S. had the 6th highest average wage in the world.  

                                           Germany has the highest.

The more productive labor, the higher the wage rate.  There is a positive correlation

between labor productivity and the wage rate.  An increase in labor productivity will shift

the labor demand curve to the right.

REASONS FOR INCREASES IN LABOR PRODUCTIVITY

     1) Increase in amount of land and capital used by labor.

     2) Increase in technology used by labor.

     3) Increase in quality of labor due to improvements in health, education and training

          of workforce.

In the long run, there is a close relationship between an increases in labor productivity and

increases in output and wage rates.

A). EQUILIBRIUM WAGE RATE DETERMINATION IN PURELY COMPETITIVE LABOR
     MARKET (no employer or employee market power)

The market determines the equilibrium wage rate (MRC) that the individual firm must pay in a

purely competitive labor market.  The firm in a competitive labor market will pay workers at the

market wage rate and hire the quantity of workers where MRC of labor = MRP of labor.


B). EQUILIBRIUM WAGE RATE DETERMINATION IN A MONOPSONY MARKET STRUCTURE
     (employer market power only)

In monopsony employers have market power and employees have none.  Common sense tells us

that the wage rate will therefore be lower in monopsony than in pure competition.  This is true in

monopsony because the firm’s (only one firm hiring in its purest form) labor supply curve = the

market supply curve which is upward sloping.  This results in an MRC of labor curve above  the

firm’s supply of labor curve  The monopsonist, like any other firm will therefore maximize profits

where MRC of labor = MRP of labor.  Note that the monopsonist only has to pay the wage rate

indicated by its supply curve which is lower than its MRP.

C). EQUILIBRIUM WAGE RATE DETERMINATION WITH LABOR UNIONS (employee market
    power only)

Where labor is unionized and there is no employer market power, the wage rate will be higher

than in a purely competitive labor market.  There are three ways that unions can increase wage

rates.
            1).  by taking steps to shift the demand curve for labor to the right (increase

                  product demand, increase labor productivity or raise the price of other

                  competing inputs.

            2).  by taking steps to reduce the supply of labor curve (shift to the left). This is

                  referred to as exclusive unionism as unions try to excludes workers from

                  the labor pool (occupational licensing is a popular way of doing this).

            3).  by including (INCLUSIVE UNIONISM all worker in an industry in the union.

                  This gives the workers the potential to strike if their wage demands are not

                  met.  This is the most powerful and effective way unions can raise wages.

D). EQUIBRIUM WAGE RATE DETERMINATION IN BILATERAL MONOPOLY (both employer
    and employee market power)

When both employees and employers have market power, the wage rate will fall

between the inclusive union wage rate and the monopsonist wage rate.  In bilateral monopoly the

wage rate will be established through negotiations between employees and employers. The

negotiated wage rate will fall somewhere between the monopsony only wage rate and the union

only wage rate.

The MINIMUM WAGE

This is a controversial topic and economists are not certain of its overall effect.  The minimum

wage represents a price floor set by the federal government below which employers can’t legally

pay labor.  Its original purpose was to help less skilled workers avoid poverty.  It is clear that the

minimum wage is not a strong anti-poverty tool, however, because many benefit who are not in

poverty.  The negatives of a minimum wage are  1) unemployment and 2) benefits those who do

not live in poverty for which it was intended.  On the plus side, the minimum wage can actually 1)

increase employment in labor markets that are monopolistic and 2) increase labor productivity

by reducing employee turnover and thus increase employment.


There are wide disparities or differentials of wage rates and annual salaries between occupations.

These WAGE DIFFERENTIALS are due to differences in supply and demand between

occupations. The causes of differences in labor demand and supply are: 1) marginal revenue

product (MRP) . Workers who generate higher MRP are paid more, 2) NON-COMPETING

GROUPS. Workers in high skilled areas don’t have competition from low skilled workers, 3)

COMPENSATING DIFFERENCES. Some jobs involve high risk and to attract workers wages

must be higher, 4) MARKET IMPERFECTIONS. Lack of job information, geographic immobility

of workers, union and government restrictions and discrimination on basis of race, religion and

sex.

INCENTIVE PAY

Wages paid employees often involve incentive pay according to pieces produced, commissions,

bonuses/stock-options/profit sharing and EFFICIENCY WAGES. Efficiency wages are wages

higher than market wages paid to workers to encourage them to be more productive or more

efficient and thus produce more output. Depending on the worker, efficiency wages can be

beneficial to companies.