Who Decides Wage Rates?

WHO DECIDES WAGE RATES?

0OBJECTIVES0Students will be able to:0Explain how sellers of labor and buyers of labor

interact to determine wage rates for labor.0Explain how productivity of workers can impact the

ability of workers to earn higher wages.

TERMS TO REMEMBER

0Wages are payments for labor services that are directly tied to time worked, or to the number of units of output produced.

0Salaries are regular payments, often at monthly or biweekly intervals, made by an employer to an employee.

0 Income is payment earned by households for selling or renting their productive resources.

LABOR MARKET0 Average Salaries of Professional Athletes0 NBA: $5.15 million (2010-11)0 MLB: $3.34 million (2010)0 NHL: $2.4 million (2010-11)0 NFL: $1.9 million (2010)0 Average Salary of Full-Time Public School Teachers in 2010–11 $56,069

0 Why does the average professional basketball, baseball, hockey and football player earn a higher salary than your high school economics teacher?

0 The athletes are some of the best in the world, sports fans are willing to pay money to see these athletes compete, professional sports are very popular. Owners of professional sports teams are willing and able to pay high wages whereas local school systems are not as willing or able to pay high wages.

LABOR MARKET

0How are the average salaries of teachers, professional basketball, baseball, hockey, and football players ultimately determined?

0The interaction of buyers and sellers of labor in a labor market.

Questions:

0What productive resource do workers sell to employers in order to earn a wage or salary?

0Workers sell their labor or human resources.0Why are employers willing to pay wages and/or

salaries to acquire workers?0Employers would expect to sell outputs produced

by workers at a price higher than the cost of production. If employers cannot sell output produced by workers at a price higher than the cost of production, they will not hire workers.

Things to Consider

0 In a labor market, workers represent the supply of labor while employers represent the demand for labor.

0Demand for labor is a derived demand. Consumer demand for a product creates derived demand for the resources, such as labor, required to make the product.

Simulation

0You will participate in a simulation in which some students will be sellers of labor and some buyers of labor.

0The simulation is designed to demonstrate how buyers and sellers of labor interact to establish wage rates for workers in a labor market.

0During this simulation, two firms are looking to hire workers: an accounting firm and a construction firm. Each firm requires unique skill sets and production capabilities from its workers.

Simulation

0Process for Hire:0 Take Skills Test0 Prepare Resume0 Interview0 Negotiate Wages0 Accept job in one of the two firms

After “Hiring Round 1”

Questions for the workers:0What wage did you agree upon with your new

employer? 0Did anybody have a job offer from both companies? 0Why they agreed to their specific wage rate? 0Why didn’t they hold out for higher wages?

After “Hiring Round 1”

Questions for Employers0What variety of wages did you agreed to pay? Why

didn’t everyone get paid the same amount? 0Why didn’t they agree on lower wages? 0Did anyone not get hired?0Why didn’t you get hired?

Hiring Round 2

0 You will now participate in a second round of the simulation.

0 The construction firm has seen an increase in the demand for housing and that more workers are needed in the construction industry.

0 You are all back to being without a job and that you are all free to explore job openings in either job market based on this new information.

0 You will be using the same resumé scores from the initial testing when you talk to potential employers about being hired.

After “Hiring Round 2”

0Workers:0How many workers decided to change professions? 0Why did those of you that changed professions do so?0Did anyone earn a higher wage in round two? 0What wage did you agree upon with your new

employer? 0Why didn’t everyone get paid the same amount?

After “Hiring Round 2”

0Employers0Did anyone pay higher wages in round two? If so,

why? 0Why did you agree to those specific wage rates? 0Please share with us your profits from Round1.0Profits in Round 2?0Please share with the workers how much you were

able to pay per point during Round 1.0Round 2?