Wages n employment: Prelim 1

Positive Economics

a theory of behavior where people typically respond favorably to benefits and negatively to costs.

Positive Economics: Scarcity

Individuals and society alike do not have the resources to meet all of their wants.

Positive Economics: Rationality

People have an objective and pursue it in a reasonably consistent fashion.

Normative economics 

social optimality based on the underlying philosophical principle of “mutual benefits”.
Markets facilitate voluntary transactions
Governments make certain transactions mandatory

Pareto-improving/Pareto efficiency

Unambiguously enhance social welfare, unanimously supportable.

Wage Rate

price of labor per working hour, measured in nominal and/or real terms.

Nominal wage: 

what workers get paid per hour

Real wage

nominal wages divided by some measure of prices

Total compensation

Earnings + Employee benefits

Earnings

wage x total hours

Employee benfits:

Either kind or deferred
Kind: Health Care, Insurance, PTO
Deferred: retirement benefits and pensions

Unearned income

Dividends, interests on investment, government transfer payments

reservation wage

the wage below which the worker would refuse the job.

economic rents

difference between the wage paid out and workers’ reservation wages.

Diminishing marginal returns

As employment expands, each additional worker has a progressively smaller share of the capital stock to work with.

payroll taxes

Employers to remit payments based on their total payroll costs. Finances programs such as unemployment insurance, Social Security retirement, disability benefits,

The Law of One Price

Workers who are equal skills within occupations will receive the same wage – there will be no wage differentials.

Quasi-fixed costs

labor costs that change with the number of workers, but not total hours worked
investments (advertising, training)
Benefits (social security, insurance, PTO)

Firms often rely on what to determine workers’ trainability (for instance, fast-learners vs. slow-learners or less-motivated vs. more-motivated) and potential MPL?

screening, credentials, signals

internal labor markets

where workers are hired into entry level jobs but then higher-level jobs in the company are filled by promotions from within.

Formal/self-enforcing contracts:

cannot be abrogated by either party without penalty, legally enforceable. Both parties obey the agreement voluntarily for best interests

Implicit contracts:

incomplete and implicit, unspecified informal understandings

Match surplus

difference between MRPL to the firm and the worker’s best alternative wage elsewhere.

Piece rate:

Workers earn a certain amount for each item/output they produce.

Commission:

Workers receive a fraction of the value of each item/output they sell.

Gain sharing:

A group incentive plan that at least partially ties earnings to gains in group productivity.

Profit-sharing / Bonuses:

Relate a worker’s pay to the profits of their firm or division

Variability of Pay:

Due to risk aversion, workers may prefer the certainty attached to time-based pay rather than output-based pay

Compensating wage differential:

when employer must offer a higher wage to compensate for an unfavorable job attribute

Worker Sorting:

Workers choosing output-based pay schemes may be signaling to the employer that they have above-average productivity or motivation.

disadvantages of merit-based pay

1. Individual effort and output does not correlate perfectly.

2. Supervisor ratings subjective due to favoritism and/or politicking...

Efficiency wage

the above-market pay at which marginal revenues to the firm from a further pay increase equals the marginal costs.

Promotion Tournaments

Winner is uncertain and based on relative performance competition.
Workers will worker harder since marginal benefits > marginal costs.
Rewards are concentrated and allocated amongst winners