11. Wage Determination
Lecture Notes
1. Nominal versus Real Wages:
a. Nominal wages (W) are money wages, unadjusted for the cost of living.
b. Real wages (W/P) are money wages adjusted for the cost of living (P) in
other words, what you can buy.
2. Earnings and Productivity
a. In theory an employee should be paid what she earns for the company,
MRP, however, this theory has serious flaws in practice.
b. Market imperfections, i.e., monopsony results in the earnings of workers
being paid to other factors of production.
c. Problems with measuring MRP, because of engineering complications of
technology.
3. Supply and Demand for Labor:
a. competitive labor market
60
, 1. The supply and demand curves for the industry are summations of the
individual firms' respective demand and supply curves. Notice that the
firm faces a perfectly elastic supply of labor curve, while the supply
curve for the industry is upward sloping just like we observed in the
product markets.
b. monopsony labor market (one buyer of labor)
61
Lecture Notes
1. Nominal versus Real Wages:
a. Nominal wages (W) are money wages, unadjusted for the cost of living.
b. Real wages (W/P) are money wages adjusted for the cost of living (P) in
other words, what you can buy.
2. Earnings and Productivity
a. In theory an employee should be paid what she earns for the company,
MRP, however, this theory has serious flaws in practice.
b. Market imperfections, i.e., monopsony results in the earnings of workers
being paid to other factors of production.
c. Problems with measuring MRP, because of engineering complications of
technology.
3. Supply and Demand for Labor:
a. competitive labor market
60
, 1. The supply and demand curves for the industry are summations of the
individual firms' respective demand and supply curves. Notice that the
firm faces a perfectly elastic supply of labor curve, while the supply
curve for the industry is upward sloping just like we observed in the
product markets.
b. monopsony labor market (one buyer of labor)
61
