6-3 Flashcards
What are the primary ways in which wages are set?
Wages are set through various methods, including collective bargaining (negotiations between firms and unions), employer decisions, and individual bargaining between employers and employees. In the U.S., collective bargaining plays a limited role, affecting just over 10% of workers, mainly outside the manufacturing sector.
How does the process of wage setting vary between different types of jobs?
For entry-level jobs, such as at McDonald’s, wages are typically non-negotiable. In contrast, new college graduates and highly skilled employees, like CEOs and baseball stars, have more room to negotiate various aspects of their contracts.
What are two key facts about wage determination common across countries?
Firstly, workers are usually paid above their reservation wage (the minimum wage making them indifferent to working or being unemployed). Secondly, wages generally depend on labor-market conditions, with higher wages linked to lower unemployment rates.
What factors determine a worker’s bargaining power?
A worker’s bargaining power is influenced by the cost to the firm of replacing them and the worker’s ease in finding another job. Highly skilled workers who are costly to replace have more bargaining power, especially when unemployment rates are low.
What is the concept of efficiency wages, and why might firms pay above the reservation wage?
Efficiency wages refer to the idea that firms may pay workers more than their reservation wage to increase productivity. Higher wages can decrease turnover, encourage employees to stay longer, and boost their morale, leading to better performance.
How do labor-market conditions affect wages according to efficiency wage theories?
In low unemployment scenarios, it’s easier for workers to find new jobs, prompting firms to raise wages to retain employees. Conversely, higher unemployment allows firms to offer lower wages while still maintaining a willing workforce.
What are the three primary factors that determine the aggregate nominal wage according to the equation W = Pe F(u, z)?
The aggregate nominal wage depends on the expected price level (Pe), the unemployment rate (u), and a catchall variable (z) representing other factors affecting wage setting.
Why do workers and firms care about real wages rather than nominal wages?
Both workers and firms are concerned with real wages because it’s about the purchasing power of the wages. Workers care about the amount of goods they can buy with their wages, and firms care about the wage cost relative to the price of goods they sell.
How does the expected price level affect nominal wages?
If both workers and firms expect the price level to double, they will agree to double the nominal wage, keeping the real wage constant. Wages depend on the expected price level because they are set in nominal terms and the relevant price level at the time of setting is not known.
Why does the unemployment rate affect aggregate wages?
Higher unemployment weakens workers’ bargaining power, leading them to accept lower wages. In terms of efficiency wage considerations, higher unemployment allows firms to pay lower wages while still retaining workers.
What is the role of the variable z in the wage determination equation W = Pe F(u, z)?
The variable z is a catchall for all other factors affecting wages given the expected price level and the unemployment rate. An increase in z implies an increase in wages. Examples include unemployment insurance, the minimum wage, and employment protection laws.
How do unemployment benefits affect wages?
More generous unemployment benefits make the prospects of unemployment less distressing, allowing unemployed workers to hold out for higher wages. Thus, higher unemployment benefits can increase wages at a given unemployment rate.
How might changes in the minimum wage or employment protection laws affect wages?
An increase in the minimum wage may raise wages just above the minimum wage, leading to an increase in the average wage. Enhanced employment protection can increase workers’ bargaining power, leading to higher wages for a given unemployment rate
How do the nature of a job and labor market conditions influence a worker’s bargaining power?
The nature of a job affects bargaining power as workers in specialized or skilled positions (hard to replace) have more power than those in easily replaceable roles (like fast-food workers). Labor market conditions also play a role; a low unemployment rate strengthens workers’ bargaining position due to the difficulty for firms to find replacements and ease for workers to find new jobs.
What is the relationship between unemployment rates and a worker’s ability to negotiate wages?
When unemployment rates are low, workers have a stronger bargaining position due to the difficulty for firms to find acceptable replacements and the relative ease for workers to find other jobs, potentially leading to higher wages. Conversely, high unemployment rates weaken the worker’s bargaining position, possibly leading to acceptance of lower wages.
