Wage Determination

6 Key excerpts on "Wage Determination"

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  eBook - PDF

  21st Century Economics: A Reference Handbook

  • Rhona C. Free(Author)
  • 2010(Publication Date)
  • SAGE Publications, Inc

    (Publisher)

  15 Wage Determination KENNETH A. COUCH University of Connecticut NICHOLAS A. JOLLY Central Michigan University W age determination refers to the market process that establishes the amount a firm pays a worker for a unit of time. A market exists when there is demand for and supply of a product. In the case of the labor market, firms demand individuals' time as an input for production, and workers supply it. The nature of the labor market, including the number of firms and spe-cial qualities of workers, influences the wage determina-tion process. Other social institutions such as the government and interactions between individuals, includ-ing those characterized by racism and sexism, also influ-ence payments made to workers. This chapter discusses the basic process of Wage Determination along with the influ-ences of market structure, government regulation, and other social interactions on it. One reason Wage Determination receives broad atten-tion among economists is that payments to labor constitute roughly 70% of the gross domestic product of every indus-trialized country. Most societies would like to put govern-ment policies in place to positively influence wage growth because, in aggregate, what people can earn relates directly to the material well-being of a country; however, this requires an understanding of what factors influence the level and growth of wages over time. Perhaps the most important determinant of wage rates is the level of education a per-son receives; however, theory indicates that general educa-tion will have a different impact on labor markets than specific training related to one industry or occupation. Governments attempt to directly affect the mix of general and specific skills among members of the labor force. Thus, studies of Wage Determination relate directly to choices of broad social policies aimed at influencing indi-vidual and social welfare.

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  Labour Economics

  • Stephen W. Smith(Author)
  • 2003(Publication Date)
  • Routledge

    (Publisher)

  3 Wage Determination and inequality INTRODUCTION

  Bringing together the insights of the previous two chapters we are now in a position to understand how the labour market forces of supply and demand determine the price of labour, the wage. We will also examine the process of labour market adjustment to changes in supply and demand. We will explain what compensating wage differentials are. We will also examine the phenomenon of wage inequality, how it has developed over time and how the situation in the UK compares to other countries. Finally we will assess the significance of minimum wage legislation on the labour market.

  THE SIMPLE LABOUR MARKET

  By now the neoclassical economists view of the labour market should be clear. The demand for labour is roughly equivalent to its marginal productivity. With labour demand responding to changes in wages and to shifts in demand for firms’ products tempered by the existence of non-trivial adjustment costs, supply is determined by the disutility of work relative to the utility of the wages offered. Labour demand is a function of pre-tax real wages whereas labour supply responds to post-income tax real wages. Between them these forces of supply and demand, illustrated in Figure 3.1 , establish the market-clearing wage W*. In such an equilibrium there is no involuntary unemployment because everyone who wants a job at W* has one.

  From this equilibrium position changes can be incorporated to demonstrate the smooth functioning of the labour market. Consider the example contained in Figure 3.2 , where improved labour productivity or an increase in demand for goods would increase the demand for labour from D to D1 in Figure 3.2 (a). Wages would rise to W1 . Workers would increase the hours they were prepared to supply or economically inactive persons would enter the labour market to expand labour supply until employment reached L1

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  Labor and the Economy

  • Howard M. Wachtel(Author)
  • 2013(Publication Date)
  • Academic Press

    (Publisher)

  The determination of wages in a labor market is treated as a specific instance in the general theory of exchange, in which the interaction in a competitive market of the supply of a commodity and the demand for it results in the determination of its price. The labor market contains a supply and demand curve as shown in Figure 3-1. 3 The supply curve slopes upward, indicating that individuals can be induced to offer more labor time to the market at higher wages. The downward-sloping demand curve indicates that employers will hire more workers at lower wages. Only at the wage rate W will there be an equilibrium in which the employers 2 Alfred Marshall, Pnnciples of Economics, 8th ed. (London: Macmillan and Co., 1920). 3 On the vertical axis is money wages—the wage received by an individual worker in nominal terms, unadjusted for inflation. On the horizontal axis, employment is measured in terms of hours of work, the product of the number of people working and the average number of hours each works. CHAPTER 3 / WAGE THEORY: LABOR DEMAND 2 5 FIGURE 3-1 Wage Determination: Perfectly Competitive Labor Market I I J 1 I Efi E E s Employment will have hired the optimal number of work units and individuals will be content to offer just enough labor time to satisfy employers' needs. No other wage will be sustainable, since forces exist that will thrust the wage rate back to W. For example, if the wage rate is W u the number of hours workers are willing to offer is E s . This exceeds the number of work units the employer is willing to pay for at that wage. The employer's demand for labor at the wage W x is E d , found by reading off the labor demand curve the number of hours of employ-ment that would be generated at that wage. Thus, the quantity of labor supplied exceeds the amount of labor demanded at the relatively high wage rate of W x .

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  Resources, Power, and Economic Interest Distribution in China

  • Zhang Yishan, Yu Weisheng, Wang Guangliang(Authors)
  • 2021(Publication Date)
  • Routledge

    (Publisher)

  7 Price determination in labor market

  According to the theory of labor economics, the labor market is where labor demand and supply interact. Moreover, the labor market reflects the economic relationships of these interactions. The market is a mechanism that allocates labor resources through two-way selection reflecting both demand and supply under the effect of the value law and the competition law. The labor market embodies an exchange relationship based on the employment of individuals. The labor market is composed of workers, employers, wages, and market organizers. Through labor, these agents influence the economy. Labor is a function that creates value reflecting the utility and capability of individuals. Labor has been an indispensable factor of economies since commodity production began. With the development of social production, labor has gradually become a more scarce resource, and the scarcity is reflected in the price of labor; that is, wages. The market pricing system for labor is based on labor exchange. Studies on labor demand and supply and the determination of fair pricing compose the main focus of labor market theories.

  A review of labor market theories

  As with normal commodity and factor markets, the labor market is a type of exchange relationship based on price. Wages represent the price of labor, and studies on wages have been conducted throughout the entire history of labor market development. In classical economic theory, Smith (1950) first addresses the division of labor in his analysis of the nature of wages and the influencing factors of wage differentials. The author analyzes demand and supply relations and wage changes, which form the basic theory framework for labor market research. Ricardo (1891) proposes the distribution theory of Wage Determination and argues that wages are determined by the cost of labor reproduction. Moreover, Ricardo analyzes wage change patterns. Say (1861) establishes the law of the labor market using the price theory of production cost as a foundation. He argues that the law of value is effective for goods, factor markets, and labor markets, and the law directs demand and supply toward equilibrium automatically. The law of value eliminates fluctuations in labor prices and ultimately attains full employment. Walras (1881) suggests marginal utility and marginal analysis based on classical economic theories. Jevons (1879) uses this method to analyze personal best choice behavior in labor markets and emphasizes that wage is determined by individual marginal productivity. Walras proposes the general equilibrium theory by investigating factors and including labor, capital, land, and goods markets. Marshall (1961) develops this theory further by adding the element of entrepreneurs’ management capability to three production factors and applies the equilibrium analysis to establish a full system of income distribution theory following neoclassical economics.

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  Price Theory

  • Milton Friedman(Author)
  • 2017(Publication Date)
  • Routledge

    (Publisher)

   12Wage Determination and Unemployment

  One topic that rests uneasily between price theory and monetary theory is the relationship of the preceding analysis of Wage Determination to the fluctuations that occur in the aggregate level of employment and unemployment. If wages are determined by the interaction of demand and supply, how can there be “involuntary” unemployment? Why do wages not move to clear the market?

  One answer is the economist’s catch-all excuse for all failures to provide a satisfactory explanation of observed phenomena: imperfections in the market, in this case in the form of “rigid” or “inflexible” wages. In its simplest form, as in Figure 12.1 , the assertion is that, while a wage rate W0 would clear the market with E0 units of labor employed, there is some imperfection that prevents the wage rate from falling below WU , at which wage rate Wr U units of labor are employed; UB unemployed, of which UA is the excess of the “full” employment level over the actual level, and AB the additional units available for employment at a wage of WTT rather than W0 .

  This formulation is not an answer but simply a restatement of the problem. Why are wages inflexible at WT ? There are obviously some special cases for which an answer is readily forthcoming, such as a legal minimum wage, in which case WU BS is the effective supply curve, replacing SS, and the solution is at the intersection of the (effective) supply and demand curves. But clearly this answer is not general.

  Keynes gave a more sophisticated answer in his General Theory by arguing that Figure 12.1 is an incomplete summary of the forces determining the real wage rate because it omits a different set of considerations, namely, those having to do with equating the amount some people want to save with the amount other people want to invest at an interest rate consistent with monetary conditions. This is not the place to examine his argument, which belongs in monetary theory rather than price theory. (See chapter 17, however, for an analysis of one phase of it.) Its significance for our purposes is that, according to Keynes, the real wage rate consistent with these saving-investment monetary conditions might be different from the real wage rate consistent with “full” employment, say, WU instead of W0 . In such a case, Keynes argued, a decline in “real” wage rates would add to employment, but such a decline could not be achieved by a decline in “money” or “nominal” wage rates, since such a decline would be matched by an exactly parallel decline in “money” or “nominal” prices. Workers, he argued, were therefore wise to resist declines in nominal wage rates. His argument is a different reason for regarding the “effective” supply curve as WU

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  Prices

  Issues in Theory, Practice, and Public Policy

  • Almarin Phillips, Oliver E. Williamson, Almarin Phillips, Oliver E. Williamson(Authors)
  • 2016(Publication Date)
  • University of Pennsylvania Press Anniversary Collection

    (Publisher)

  Given labor requirements and effective demand, these three equations serve to explain price level, wage rate, and labor force. In each case there are different economic actors or agents at work. Price-determination (or labor demand) is a business-production decision; Wage Determination is a joint business (employer)-household (employee) bargain; and labor supply is a consumer household decision. In structural analysis, at the levels of statistical estimation and economic application, it is of great importance to maintain the right associa-tion between a group of relevant economic agents and the decisions for which they are responsible. This will help us to avoid confusion between reduced forms and structural relationships. A BRIEF SURVEY OF MACROECONOMETRIC APPLICATIONS The above skeleton system has been applied in some form or other in a variety of models, each with its own special circumstances. These are re- L. R. Klein 89 viewed here to acquaint students with a variety of situations before we take up some new paths of analysis for the United States economy. THE BROOKINGS MODEL: 3 The price and wage equations (by indus-trial sector) set up by C. Schultze and J. Tryon follow the skeleton layout, but there are some significant modifications and extensions. The price-formation equations are not pure mark-up relations over unit labor costs. There is a distinction in the relation between actual and trend values of unit labor costs, and in one case there is an accounting for raw material prices. More important, however, is the inclusion of a direct measure of demand pressure by using a variable showing the ratio between inventory stocks and sales. This is a significant modification of the price-formation equation in the skeleton model.

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