Chapter 28  Wage Determination

Return to Quick Economics Notes Updated 2/20/18   Please link, use to educate and 

I. Labor Productivity, Market Forces Determine Wages
II. Competitive Model

III. Monopsony
IV. Unions
V. Craft Unions vs. Inclusive Industrial Unions

VI. Bilateral Monopoly
VII. Minimum Wage with extensive readings
VIII. Wage Differentials with extensive readings
IX. Worldwide Differences
X. Education Stuff

Current Issues
Middle Income Stagnates
Income Inequality Analysis and Cures
Income Inequality Exposed

Solving the Lack of Good Jobs

 I. Labor Productivity, Market Forces Determine Wages

     A. Introduction 
   1. Wage determination is of interest because most people
              devote much of their time to wage-earning activities.
      2. Wage earners include both blue and white collar
             workers and professionals.
    B. Factors affecting labor productivity
         1. Quality (health, education, etc.) of the work force.
             a. Educating the Class of 2030
             b. Changing Education Paradigms from the Royal Society for
                 the encouragement of Arts, Manufactures and Commerce

    2. Quantity and quality of capital supporting labor
           3. Use of technology Geekability the New Intelligence
           4. Management efficiency
           5. Business, social and political climate
           6. Cost and availability of natural resources
     C. Wage determination models
         1. Competitive model: many buyers and sellers acting 
             independently such as the market for unskilled workers
         2. Monopoly power models
             a. Monopsony model: one buyer, many sellers
                 such as the one-factory towns of rural America
             b. Union models: one seller of labor
                 1) Exclusive craft model: electrical workers
                 2) Inclusive industrial model: auto workers
             c. Bi-lateral monopoly: one buyer and one seller which occurs
                 when unionized workers such as major league baseball players
                 negotiate with one buyer such as
major league baseball.

   D. Middle Class Wages

Krugman on the Need for Jobs Policies  

           2. Worker wage inequality myth exposed   
              lack of skills, education not the problem

    E. Labor's Share is Getting Smaller but we work less.



         F. Productivity is not the cause of stagnate wages in the US and Germany.


The Economist Magazine  5/4/13 Please  

Graph from Market Watch

Income Increased for Each Group by About 20%
Winter 2018 edition 

Editor's Note: Not a representitive period.

   II. Competitive Model
      A. Many buyers and sellers, from a few to tens-of-thousands of 
            workers and a proportionate number of buyers (companies).
        B. No single company has high enough demand
            to affect wages (price).
        C. Workers (supply) act independently.
        D. Industry supply is up sloping as companies must 
            pay higher wages to induce more people to work.
        E. Marginal resource cost (MRC) is the change in total costs
            which results from hiring one more unit of resource.
        F. For a firm buying labor in a competitive market, supply is
            equal to marginal resource cost (MRC) because the firm
            may buy all the workers it desires at the rate set by industry
            supply and demand.

   G. Worker skills and company needs are very similar. 
           An example would be unskilled workers seeking menial work.

  H. In Defense of Sweatshops

III. Monopsony
A. One buyer interacting with many independently acting sellers 
        B. Firms maximize profits by equating marginal resource cost
            (the cost of hiring an additional worker) 
            with marginal revenue product (the revenue generated by 
            the use of an additional worker). 
            1. MRC will be above the supply line as wages must be 
                increased to entice more people to work for a firm. 
            2. The logic here is similar to that of the marginal revenue
                curve being below the demand curve.
        C. A single-payer universal health care system, in which a
             government is the only "buyer" of health care services, is 
             an example of a monopsony. America's defense department is
             another example.
        D. Economic analysis
            1. Pure competition results in more workers being hired 
at a higher wage rate 
            2. WM < WPC and QM < QPC

     E. Monopsony Model from Wiki
F.  monopsony is not OK Paul Krugman 1019/14
              1. Some agree

              2. Some disagree

      G. Oligopsony a few buyers, often yields similar results. 
              American tobacco growers face an Oligopsony of cigarette makers,
              where three companies (Altria, Brown & Williamson, and Lorillard
              buy almost 90% of all tobacco grown in the US. 

for Workers



6 1 6 6 4
7 2 14 8 3
9 3 27 13 2
12 4 48 21 1


IV.  Unions   
A. Introduction
         1. A union is an organization of workers
             selling their services collectively.
         2. Unions have many goals.
            a. Primary goal of higher income is
                becoming less important.
            b. Recent emphasis has been on 
                employment security.
      B. There are many methods of achieving
           higher wages.
          1. Increase demand (MRPL) for labor
              a. Increase product demand   
                 1) Advertising the union label
                 2) Sponsoring trade restrictions 
                     such as tariffs and quotas
              b. Increase the productivity of workers
                 1) Encourage cooperation with labor-
                     management committees 
                 2. Negotiate worker training and
                     education programs
          2. Control the supply of workers hired
              a. Require apprenticeships, licenses   
              b. Restrict immigration and child labor
              c. Encourage shorter workweek and
                  family leave programs
              d. Keep unneeded jobs management
                  wants to eliminate (featherbedding) 
              e. Require closed shops which limit
                  hiring to union members
              f. Require union shops where new
                 workers to join after a set period
              g. Against open shops where all may
                  work, joining union is voluntary

   C. Wagner Act National Labor Relations
           Act of 1935 became known as the "Magna Charta"
           of labor because it increased union power.
          1. It made company-sponsored unions
              illegal, stopped company interference 
          &nb   with unionizing activity (strikes),
              prohibited discrimination against union
              members, and required companies to
              bargain in good faith. 
         2.  National Labor Relations Board set 
              up to investigate/stop unfair labor

     D. Taft Hartley Act  of 1947 decreased
          union power.
          1. Outlawed a  closed shop where
              companies must hire union members.
          2. Allowed state right-to-work-laws make
              union shops requiring workers eventual
              become union members, illegal in 21
              states. (Right to Work States)
          3. Outlawed Featherbedding  (keeping
              positions even though there is no need,
              i.e. firemen on a electric train) 
          4. Secondary boycotts or sympathy
(companies the employer does
              business with also feel a boycott)   
     E. Labor Day and the low-wage future
         is a 10 minute video on the history of
         Labor Day
and some current data 9/7/09
Struggling To Get Ahead: The Age Demographics Of Weekly Earnings
     G. Books also help the education process.
         1. The Jungle
 exposure of health violations and unsanitary practices 
             in the early 20th century American meatpacking industry.
2. The Octopus exposed government corruption
The Bitter Cry of Children exposed the terrible child working conditions.
             Some tried night school but after working ten hours learning to read was difficult.
H. Readings
           1. Janus and fair share fees organizations financing attacks on unions’ to represent workers
2. U.S. Strikes, Lockouts Remained Near Record Lows in 2010 2/8/11
         3. Is the Supreme Court Killing Unions 7/11/14
Most people work just hard enough not to get fired and get paid just
             enough money not to quit. George Carlin Read more at   George Carlin
         5. Lets Remember What Unions Have Done for America
has extensive information and links
Union movement misses big opportunity to halt its decline
                Economist Magazine 2/22/14

    I. Labor Power is Down

The downward pressure on compensation is connected to the rapid erosion of labor-union power. In 2012, unions lost 400,000 members, or 2.7 percent, and their representation in the labor force fell to 9.3 percent, from 9.6 percent in 2011 and more than 25 percent in the 1960s. In the private sector, unionization fell to 6.3 percent, with the sharpest declines in manufacturing and construction.

More states are passing right-to-work laws, which allow employees in unionized workplaces to opt out of paying union dues. In the past year, private-sector employees in right-to- work states earned 9.8 percent less than workers in other states. Manufacturing jobs pay 7.4 percent less in right-to-work states. On the other hand, the number of jobs in such states grew 4.9 percent in the past three years, compared with 3.9 percent in non-right-to-work states.

Municipal governments are under pressure to cut costs. Local tax collection is subdued because of earlier declines in property assessments and taxes, which account for 79 percent of revenue. State tax collections have revived, thanks to increases in corporate and personal income taxes and in sales taxes. Yet many states still face budget problems because of the fading effects of the federal stimulus enacted in 2009, which was used for infrastructure projects and to preserve teachers’ jobs. In addition, the Medicaid costs borne by the states are ballooning, and temporary taxes instituted during the recession are expiring. Vastly underfunded defined-benefit pensions are also fueling state and local government retrenchment.

New York police violently attacking
 unemployed workers in 
Tompkins Square Park
, 1874

From Page 60 of the April 24, 2010 edition of The Economists. For the complete article read  You haven't seen nothing yet. 

Ida M Tarbell crop.jpgIda Tarbell and other investigative journalists were called Muckrakers. She exposed Standard Oil Trust. Working for McClure Magazine and other monthly magazines they help educated the public from 1890 to 1929 in what is known as the Progressive Era.


J. National Review reports that 0.55 percent of the federal work force
     were fired in 2011. That was 1/5 the separation rate for the private
     sector. A firing offense can take 18 months to process so many
     workers just get transferred. 6/7/13 The Week magazine.


The Intercept interviewed former EPI President Larry Mishel on the labor movement’s plans to shift the balance of power back to workers in 2018 and 2020. Mishel said the “Better Deal” package of reforms unveiled by congressional Democrats in 2017 includes some “seriously bold” ideas, including a ban on the permanent replacement of striking workers. | EPI’s Heidi Shierholz explained to Vice News why President Trump can’t claim that his tax cuts for corporations will create jobs. Corporations already have record-high levels of cash they could be investing in job creation. “You’re encouraging companies to hire workers based on incentives that they already have,” said Shierhols an extraordinarily inefficient way to create jobs.” | Trump is Taking Credit for a Thriving Economy He Had Nothing to do With »



J. Do Private Sector Unions Still Have a Future in the US
The Washington Post By Brad Plumer, 6/13/13




K. Wages are losing the battle with profits

V. Craft and Inclusive Union

      A. Craft Unions vs.

         1. Organized in 1886 by Samuel Gompers
as the American Federation of Labor -AFL
a. Each trade was autonomous.
             b. Union was not political. 



B. Inclusive Industrial Union

    1. The Congress of Industrial
     Organizations (CIO)
was organized
        in 1936 by John L. Lewis who
        broke with the AFL because 
        mass production workers need
        a different type organization. 
        See Decline and resurgence of the
        US auto industry

         2. Skilled workers were organized.
     2. Unskilled workers were organized.
         3. High skill requirements naturally limited
             supply and unions tried to reinforce limited
     3. Limited skills make limiting supply
         4. Tried to shift supply of workers to the left
             with licensing, apprenticeships, child labor
             laws, etc. to increase wages.
     4. Controlled  supply of workers and
         emphasized collective bargaining
         to increase wages.




May, 2011 The Rise of the McWorker 
The evidence points to the latter. According to a recent analysis by the National Employment Law Project (NELP), the biggest growth in private-sector job creation in the past year occurred in positions in the low-wage retail, administrative, and food service sectors of the economy. While 23% of the jobs lost in the Great Recession that followed the economic meltdown of 2008 were “low-wage” (those paying $9-$13 an hour), 49% of new jobs added in the sluggish “recovery” are in those same low-wage industries. On the other end of the spectrum, 40% of the jobs lost paid high wages ($19-$31 an hour), while a mere 14% of new jobs pay similarly high wages. 
For more read  Welcome to the McJobs Recovery Andy Kroll, TomDispatch

 In 1955 the AFL and CIO merged
 into the AFL-CIO.

Unions: Good or Bad?  
from the Motley Fool


Have American CEO's Created 
an Exclusive Craft Union?

VI. Bilateral Monopoly

       A. Monopsony vs. union (monopoly) 
       B. Could the net result be close to that of a competitive market? 
           1. The answer depends upon negotiation results. 
           2. If bargaining power is split equally, wages paid and quantity
               hired could be similar to that of pure competition but below the
               union rate and above the monopoly rate.
      C. THEODORE ROOSEVELT took on the corporate monopoly
           trusts that control railroad rates and routes and thus destroyed
           small towns and farms.
      B. Bilateral monopoly from Wiki

Teddy Roosevelt




VII. Minimum Wage
          A. A minimum wage is a price floor put on 
              wages to stop them from falling below 
              some legislated level. 

          B. The result may be a surplus of workers
               (unemployment). See graph
          C. Studies conducted in the 1990's showed
               that increasing the minimum wage did 
               not increase unemployment though the
               economic expansion of the period created
               a shortage of workers. 
           D. Minimum Wage Review 
           E. "The Economic Debate over Minimum

               Wage Effects"  from blog Econbrowser. 
          F. Minimum Wage by State
          G. What happens if fast food workers

              got a big raises
Bloomberg's Business Week 2/8/13
           H. Case study San-Jose Hiked Minimum

Wage 4/14/14
    I.  Living wage calculator based on typical
               expenses in specific locations from MIT.
J. Purchasing Power of Minimum Wage
               Varies by State
K. Employment Elasticity to Minimum Wage
           L. Additional Minimum Wage Material
1. Many states have departed from
                   the federal minimum wage.
               2. Washington has the highest
                   minimum wage in the country at
                  $7.93 as of January 1, 2007.
               3. For a vast amount of material on
                   the minimum wage visit
                   a. Almanac of Policy Issues
                   b. Wikipedia
                   c. U.S. Minimum Wage History
2010 State Minimum Wages
               4. Germany has a marginal employment
                   rather tan a minimum wage
               5. Living wage by state from MIT

               6. Study Reduces Minimum Wage
               7. State buying Power of-Minimum 
5 facts about the minimum wage




Economist Magazine11/20/10

Some Think Our Flat World
 Keeps US Wages Down

The Economist 11/24/12

Destination Unknown
Large increases in the minimum wage could have severe long-term effects   7/25/15

VIII. Wage Differentials
          A. Wages are determined by marginal revenue
               product so entertainers who sell the most
               tickets make the most money.
          B.  wage differentials between occupations
          C. Work requirements differ so many workers
               with different ability and education form
               non-competing groups.
          D  Non monetary compensation, sometimes
               called psychic income, differ so working
               in a white shirt air-conditioned office might
               pay less them working outside in the heat
               or cold.

E. Performance Pay
              1. Bonus, stock options, and profit sharing
                  for corporate executives and revenue

              2. Piece Rate, commissions and royalties
                  are common.
              3. Negative side affect
                  a. product quality
                  b. aggressive, sometime illegal and
                      unethical, sales technique
                  c. short run attitude at e the expense of
          F. Pay-for-Performance Doesn’t Always Pay
          G. reported that 2014 WS bonuses
               were almost twice the earnings the 1.03
               million full time workers earning the
               Federal minimum wage. 3/27/15 The Week


          H. Economic gain from investing in education is going down.
              1. Over the last 20 years, the need for above average college
                  graduate has increased from about 22% to about 31%.
              2. There was a slight over supply until 1995 when a dramatic
                   increase in college graduates made the over supply
              3. The mean household income peaked in 2000 and since,
                  has dropped almost 10%.

4. The decrease is more substantial than it appears.
                  a. Household income is biased higher by young people
                      delaying children thus increasing opportunities of
                      two-income families.
                 b. The within cohort variability has been increasing as the better 
                      skilled college graduates have been earning much more than
                      average and the college graduates with few usable skills
                      earn substantially less, little more than a high school
I. Recent Studies
a. A Proposal for Protecting Low‑Income Workers from Monopsony and Collusion
Revising Wage Growth

J. Readings
1. To fight the slow pace of gender equality in the workplace, attack the root ca

   2. The State of Working America 
   3. Applied Economics         
   4. Capital Ideas Evolving     
   5. The Lexus and the Olive Tree   
   6. Capitalism, Socialism, and Democracy
   7. Job Polarization
   8. Indentured servant we have come a long way
How to Shorten the working Week
   10.Is Purely Competitive Adjustment Causing a New Normal for Wage Gains?
From chapter 23.
11. Comprehensive immigration bill disaster for US workers The Economic Populist

2. Tech companies lobbying immigration USA Today 4/30/13
3. Have and Have not: New study shows just how slow it is to change social class
14. Kevin Erdmann on capital income, rental income and labor compensation
with links it is extensive and may be read after the next chapter.
15. Progress and Poverty depicted the superficial contradictory world of the 
     Gilded Age
16. Trade Agreements and U.S Jobs









IX. Worldwide Differences

Comparing Payroll Taxes


Europe Tries to Limit Socialism's Unintended Consequences

Hours Worked Have Been Dropping


X. Education Stuff

A Proposal for Protecting Low‑Income Workers from Monopsony and Collusion

Changing Education Paradigms from the Royal Society for Encouragement of Arts, Manufacturing, Commerce is a must watch 14 minute video which explores how our current educational system has gone in an unproductive detour and stifles creativity.

Educational Ideas From Economists  
has more interesting thoughts.

Educating the Class of 2030

/Economics of a College Education

Business Book Mall sponsors

Does this mean that MRP 
does not equal MRC

Chart is from Bureau of Labor Statistic PDF (3.5M), page 15
Data are in United States dollars at current prices and current purchasing power parity for the reference year.
Rank Country Median
1  Luxembourg 34,821 2010
2  Norway 32,820 2010
3  Switzerland 31,493 2009
4  United States 29,056 2010
5  Canada 28,914 2010
6  Austria 28,089 2010
7  Australia 27,946 2010
8  Denmark 26,744 2010
9  Netherlands 25,715 2010
10  Germany 25,569 2010
11  Finland 24,778 2010
12  Belgium 24,709 2010
13  Sweden 24,614 2010
14  Iceland 24,610 2010
15  France 24,221 2010
16  United Kingdom 24,047 2010
17  South Korea 23,994 2011
18  New Zealand 23,444 2009
19  Italy 21,894 2010
20  Ireland 21,804 2009
21  Japan 21,410 2009
22  Slovenia 20,385 2010
23  Spain 18,736 2010
24  Israel 16,957 2010
25  Greece 16,570 2010
26  Czech Republic 15,348 2010
27  Slovakia 14,473 2010
28  Portugal 14,064 2010
29  Poland 13,414 2010
30  Estonia 11,564 2010
31  Hungary 10,319 2009
32  Chile 9,577 2011
33  Turkey 7,944 2009
34  Mexico 5,132 2010


low wage jobs

ssa average median wage 2013 labor-force-participation-1950-2014

Source: economic populist org has much more data.


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Data are in United States dollars at current prices
and current purchasing power parity for the reference year.
Rank Country Median
1  Luxembourg 34,821 2010
2  Norway 32,820 2010
3  Switzerland 31,493 2009
4  United States 29,056 2010
5  Canada 28,914 2010
6  Austria 28,089 2010
7  Australia 27,946 2010
8  Denmark 26,744 2010
9  Netherlands 25,715 2010
10  Germany 25,569 2010
11  Finland 24,778 2010
12  Belgium 24,709 2010
13  Sweden 24,614 2010
14  Iceland 24,610 2010
15  France 24,221 2010
16  United Kingdom 24,047 2010
17  South Korea 23,994 2011
18  New Zealand 23,444 2009
19  Italy 21,894 2010
20  Ireland 21,804 2009
21  Japan 21,410 2009
22  Slovenia 20,385 2010
23  Spain 18,736 2010
24  Israel 16,957 2010
25  Greece 16,570 2010
26  Czech Republic 15,348 2010
27  Slovakia 14,473 2010
28  Portugal 14,064 2010
29  Poland 13,414 2010
30  Estonia 11,564 2010
31  Hungary 10,319 2009
32  Chile 9,577 2011
33  Turkey 7,944 2009
34  Mexico 5,132 2010



From The Story of the American Recovery in 15 charts 
5/8/14 The Washington Post



Power to the People



federal minimum wage over time


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