Wage and Salary Determination: An Analysis of Competitive Labor Markets and Minimum Wages, Study notes of Microeconomics

Download Wage and Salary Determination: An Analysis of Competitive Labor Markets and Minimum Wages and more Study notes Microeconomics in PDF only on Docsity! Econ 201 Lecture 25 Wage and Salary Determination Example 25.1. Brady's Brick Company is one of hundreds of small firms that hire labor to mould bricks out of clay, which are then sold in the world market for ten cents apiece. Brady's only costs are its labor costs, and it has two brickmakers, John and Sue. Sue makes 40 bricks per hour and John makes 30. If the labor market for brickmakers is competitive, how much will Sue and John be paid per hour? The value of the extra bricks that Sue makes is $4.00 per hour and this will be her wage under perfect competition. Any firm that paid her less would risk having her bid away by a competitor. Any firm that paid her more would lose money by employing her. Likewise, the competitive equilibrium wage for John is $3.00 per hour. In competitive labor markets, workers are paid the value of what they add to the employer's revenue. In many production processes, when a firm's capital and other productive inputs are held fixed, the productivity of each worker declines as the firm hires more workers. This pattern is often called The Law of Diminishing Returns. It explains why the world's population cannot be fed by the amount of grain grown on a single acre of land, now matter how many farm workers we employ. Example 25.2. The Acme Widget Company sells widgets for $1.00 each, and hires workers in a competitive labor market at a wage of $2.50/hr. The number of widgets varies with the number of workers as follows: # of workers widgets/hr extra widgets/hr 0 0 1 10 10 2 16 6 3 20 4 4 22 2 5 23 1 How many workers should Acme hire? Hiring the third worker adds 4 widgets per hour, which boosts Acme's revenue by $4.00/hr. Thus the benefit of hiring the third worker ($4.00/hr) exceeds the cost ($2.50/hr). Hiring the fourth worker adds only $2.00/hr, which is less that it costs. So Acme should hire 3 workers. Note that the number of workers hired depends not only on the amount of goods or services a worker produces, but also on the extent to which buyers value those goods or services. Example 25.3. Suppose the price of widgets rises to $2 each in the preceding example. How many workers should Acme hire? # of workers widgets/hr extra widgets/hr 0 0 1 10 10 2 16 6 3 20 4 4 22 2 5 23 1 6 23 0 Now the fourth worker makes $4.00/hr worth of extra widgets, so he should be hired. The fifth worker adds only $2.00/hr worth of widgets, which is too little to cover his $2.50/hr wage rate. So Acme should now hire 4 workers instead of three. 2 S D = price x marginal product of labor L w w* L* Minimum Wages When the law prevents employers from paying a wage less than Wmin, the result is for employers to demand fewer workers. Unemployment results. The workers who keep their jobs earn more than before. Those who lose them earn less. Whether workers as a whole earn more or less depends on the elasticity of demand for labor. If elasticity is less than 1, workers earn more. If more than 1, workers earn less. Wage ($/hr) Employment S D L W W Unemployment min 1 0L Lost surplus due to minimum wage Wage ($/hr) Employment S D L W Wmin 1 0L Example 25.4. In the labor market whose supply and demand curves are as shown, by how much will the imposition of a minimum wage of $8/hr reduce employer surplus? By how much will it increase worker surplus? 5 The Wage Structure When Local Rank Matters Compensating Differentials for Morally Satisfying Work Example 25.8. After graduating from Cornell you plan to pursue a career in advertising. You have two job offers, one to write ad copy for the United Way, the other to write copy for Camel Cigarette ads aimed at the youth market. Except for the subject matter of the ads, working conditions are identical in the two jobs. If the two jobs paid the same which would you choose? Six hypothetical career decisions Ad copywriter for Camel Cigarettes Accountant for a large petrochemical co. Language teacher for the CIA Recruiter for Exxon Lawyer for the National Rifle Assn. Chemist for Union Carbide Ad copywriter for the American Cancer Society Accountant for a large art museum Language teacher for a local high school Recruiter for the Peace Corps Lawyer for the Sierra Club Chemist for Dow Chemical Reservation Pay Premiums for Sacrificing the Moral High Ground Amer. Cancer Soc. Art museum High school Peace Corps Sierra Club Dow Chemical Percent choosing 88.2 79.4 82.4 79.4 94.1 79.4 Median pay premium for switching $15,000/yr $5,000/yr $8,000/yr $5000/yr $10,000/yr $2,000/yr Average pay premium for switching $24,333/yr $14,185/yr $18,679/yr $13,037/yr $37,129/yr* $11,796/yr *Excludes one response of $1,000,000,000,000/yr. 1989 Starting Salaries for Private and Public Interest Lawyers 6 1st-Year Public Interest Lawyers American Civil Liberties Union, New York: $28,000 Center for Constitutional Rights, New York: $29,000 People for the American Way, Washington, DC: $25,000 Public Citizen Litigation Group, Washington, DC: $21,000 1st-Year Associates in Private Law Firms Millbank, Tweed, Hadley & McCoy, New York: $83,000 Skadden, Arps, Slate, Meagher & Flom, New York: $83,000 Arent, Fox, Kintner, Plotkin & Kahn, Wash–ington, DC: $66,000 + $2,000 signing bonus Dow, Lohnes & Albertson, Washington, DC: $67,000. Source: National Law Journal, March 26, 1990