ABOVE-EQUILIBRIUM WAGES: MINIMUM-WAGE LAWS, UNIONS, AND EFFICIENCY WAGES

Most analyses of wage differences among workers are based on the equilibrium model of the labor market-s-that is, wages are assumed to adjust to balance labor supply and labor demand. But this assumption does not always apply. For some workers, wages are set above the level that brings supply and demand into equilibrium. Let’s consider three reasons this might be so.

One reason for above-equilibrium wages is minimum-wage laws, as we first saw ill Chapter 6. Most workers in the economy are not affected by these laws because their equilibrium wages are well above the legal minimum. But for some workers, especially the least skilled and experienced, minimum-wage laws raise wages above the level they would earn in an unregulated labor market.

A third reason for ‘above-equilibrium wages is suggested by the theory of efficiency wages. This theory holds that a firm can find it profitable to pay high wages because doing so increases the productivity of its workers. In particular, high wages may reduce worker turnover, increase worker effort, and raise the quality of workers who apply for jobs at the firm. If this theory is correct, then some firms may choose to pay their workers more than they would normally earn.

Above-equilibrium wages, whether caused by minimum-wage laws, unions, or efficiency wages, have similar effects on the labor market. In particular, pushing a wage above the equilibrium level raises the quantity of labor supplied and reduces the quantity of labor demanded. The re ult is a surplus of labor. or unemployment. The study of unemployment and the public policies aimed to deal with it is usually considered a topic within macroeconomics, so it goes beyond the scope of this chapter. But it would be a mistake to ignore these issues completely when analyzing earnings. Although most wage occurrences .ln be understood while maintaining the assumption of equilibrium in the labor market, above-equilibrium wages play role in some cases.

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