Lecture 6 - CHAPTER 6 The Labor Market 1 of 35 Wage...

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Unformatted text preview: CHAPTER 6 The Labor Market 1 of 35 Wage Determination 2 of 35 Common forces at work in the determination of Common forces at work in the determination of wages include: wages include: A tendency for the wage to exceed the reservation wage , or the wage that make them indifferent between working or becoming unemployed. Dependency of wages on labor market conditions. Lower unemployment the higher the wages. 6-3 Bargaining How much bargaining power a worker has depends on two factors: How costly it would be for the firm to replace him —the nature of the job. Ex: If costly, bargaining power of worker rises How hard it would be for worker to find another job—labor market conditions. Ex: If unemployment rate rises bargaining power of worker falls and bargaining power of firm increases. 3 of 35 Efficiency Wages Efficiency wage theories are theories that link the productivity or the efficiency of workers to the wage they are paid. These theories also suggest that wages depend on both the nature of the job and on labor-market conditions: Firms that see employee morale and commitment as essential to the quality of their work, will pay more than firms in sectors where workers’ activities are more routine. Labor market conditions will affect the wage. High unemployment=lower bargaining power of workers, lower wages. Low unemployment=higher quits, higher bargaining power of workers, high wages. 4 of 35 Wages, Prices, and Unemployment 5 of 35 Wages, Prices, and Unemployment The aggregate nominal wage, W , depends on three factors: The expected price level, P e The unemployment rate, u A catchall variable, z, that catches all other variables that may affect the outcome of wage setting....
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This note was uploaded on 01/05/2012 for the course ECON 202 taught by Professor Tunc during the Spring '10 term at Middle East Technical University.

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Lecture 6 - CHAPTER 6 The Labor Market 1 of 35 Wage...

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