Summary of Chapters 7, 8, 9 & 10
Chapter 7: Alternative Pay Schemes and Labour Efficiency
In this chapter, McConnell, Brue and Macpherson give a concise definition of total compensation as involving wages and fringe benefits. There entails a difference between fringe benefits and wages. The chapter establishes that fringe benefits incorporate legally needed benefits like social security contributions, and voluntary benefits. In this case, the voluntary benefits range from paid leaves, insurance benefits to private pensions. The authors of this book acknowledge that fringe benefits take approximately 30 percent of an employee’s total pay in the broader perspective. Wages take the form of daily pay for employees especially those on contract for their short-term accomplishments of work allocated to them. In this chapter, there is a reference on the indifference map discussed in earlier chapters. Notably, it is possible to establish an employee’s preference for wages and fringe benefits on an indifference map. When there are many curves on the indifference curve, curve indicates the various combinations of wages and fringe benefits that produce a certain level of utility or satisfaction.
In the chapter, there is also a focus on the employer’s normal profit curve. According to the writers of this book, this curve displays a wide range of combinations of wages and fringe benefits that result into a normal profit. In the capacity of an employee, it is possible for him to attain an optimal or maximise utility combination of wages and fringe benefits through choosing the wage-fringe mix that facilitates the worker to achieve the highest possible indifference curve. At this level, the chapter gives a historical disposition of wage and fringe benefits. A number of factors are in relation to the historical growth of fringe benefits. Among the factors, there is:
- The tax advantages that they present
- The scale economies that emanate from their collective purchase
- Their capacity to cut down on job turnover through motivation of workers
- The sensitivity of these fringe benefits involving medical and dental care, to the increases in income
- Legal mandates offered by the federal government in relation to fringe benefits
- Ultimately is the historical development of union agreements, in which fringe benefits are relatively large
The chapter then moves to consider the relationship between corporations and workers. It establishes that this relationship is one of the principals and agents. In alternative pay schemes and labour efficiency, companies try to reduce the gap between the principal and the agent. In most cases, this conflict between firms and workers occur when the two focus on exceeding different goals rather than the objectives of the firm. In this section, there is a shift to focus on piece rates, commissions and royalties. The Authors assert that these pay schemes relate compensation directly to productivity. This implies that the amount of wages and fringe benefits that an employee receives is directly in relation to the amount of work delivered by the subject. In most firms, workers that earn salaries on a yearly basis may receive an incentive to reduce work hours below the normal level, which they would work in case their pay was on an hourly basis. As a result, the chapter draws a conclusion that ideas of elevations and promotions reduce the main problem of the increased gap between the principal and the agent.
At the next level of this chapter, the focal point is on how bonuses can increase productivity in a firm. It is clear that bonuses can result into greater work efforts and result to an increase in productivity. However, caution entails when dealing concerns bonuses. In most cases, bonuses come in a different dimension, individual performance and teamwork. In the event of bonuses related to personal performance, there is a shift of behaviour away from team goals. As a result, McConnell, Brue and Macpherson propose the use bonuses base on a team or company performance. This still has its own disadvantage especially in creating a patent free-rider problem in case the team of employees is large. Reference entails to research done in this area. The authors point out the possibility of executive bonuses having a positive impact towards corporate performance. Assuming minimal free-rider problems, profit-sharing plans and stock options synchronize the interests of firms and their workers. Authors of this book point out that their entail a positive aspect amid productivity and the sharing of profits.
The final section of this chapter considers tournament pay, which attaches a uniquely elevated incentive to the top performer. This considers performance maximisation by all workers focused on attaining the peak. In some cases, high CEO compensation is effective when it comes to such payment schemes. However, there are critics who dismiss this idea as being a rationalisation of the CEO pay.
Chapter 8: The Wage Structure
This chapter has a theoretical framework. It proposes that if all workers and jobs were homogeneous, and all labour markets were perfectly competitive, then it would be possible for workers to move among the various jobs until incentives like wages and fringe benefits in all corporations and labour markets were identical. The chapter carries out a causal and empirical assessment of the rates of wages and weekly income. The two variables reveal a wide range of differentials that exist, and most of them are persistent over some time. According to this argument, a number of nonwage factors of jobs affect supply decisions in such a way that results into compensating wage differentials. These aspects include risk of job injury and death, fringe benefits, job status, job setting, the regularity of payment, and the implication for salary advancement. In addition, the wage difference depends on differences in expertise requirement. When other factors are constant and there is a need to attract enough employees to an occupation that needs considerable initial investment in human resources, corporations ought to pay these employees more than they pay less experienced workers.
There are efficiency theories that explain pay diversities within companies in order to establishing the wage structure, According to these theories, wages will be higher where it is hard to monitor employee performance, as well as where the costs to employers of mistakes individual employees are immense. Similarly, high labour turnover significantly reduce productivity and increase wages. The authors of this book establish that a key source of wage disparity entails heterogeneous workers. In essence, employees have immensely varied stocks of human resource. They also differ in preferences of a wide range of nonwage factors of work. As a result, the ultimate labour market involves numerous submarkets consisting of groups of workers who provide little competition to the other group.
This chapter proposes the hedonic theory of wages as being efficient in designing the wage structure. In this theory, workers who possess varying biased preferences for wages as opposed to nonwage job amenities search for best matches with employers who differ in their costs of providing those nonwage characteristics. This model has a number of implications. The basic implication is that labour markets will engender sustainable wage differentials, even among people who have similar stocks of human capital. This gives reason as to why there are wage differences among employees within the same firm or labour market. Another case of the wage differential emanates from imperfect and costly market information. This data generate variances of wage rates. This is independent of other aspects and explains why transitional wage differentials in most cases are long lasting. The authors of this chapter sum up the ideas of wage structure through offering an insight on the contribution of geographic, institutional, and sociological aspects towards disparities in earnings among workers.
Chapter 9: Mobility, Migration, and Efficiency
This chapter focuses on mobility, migration and efficiency in the labour market. In the initial stages of this chapter, the authors consider mobility. They assert that mobility takes different forms that may include occupational mobility and geographic mobility. They talk of mobility as being the ability of an individual employee, family or a group of people to improve their economic status. Mobility as seen in the chapter discussion concerns the level of income an individual, family or group of people acquire from the labour market. The chapter also looks at economic mobility. Measurement of economic mobility is through shifts between income quintiles. This transition influences social mobility, which is also a measure of change in income. For instance, the graph indicates a type of economic mobility: the intergenerational income elasticities for nine developed countries. This graph gives a trend into the establishment as to whether poor children may end up as poor adults.
In the current labour market, the chapter indicates that individuals can exhibit mobility through migration. They work out of their way from one economic status to another. As seen in this chapter, the decision to move or migrate takes a human capital point of view. In this case, the current value of expected gains in lifetime income compares to investment costs. These costs may include transportation expenses, forgone earnings during the transition as well as psychic costs. In making the decision on migration, there are the factors that prove critical. Among these factors, it is evident that age is inversely proportional to the probability of migrating. On the contrary, family status affects migration decisions in a number of ways. There is a positive relationship between the level of educational achievement and mobility. This implies that the educated individual move from one economic status to the next. When plotting the graphs of mobility, it is evident that the likelihood of migration and the distance of the move are in relation negatively. Similarly, unemployed people are more likely to migrate as compared to those in the job market. The final factor is that high unemployment rate in an objective sector reduces the possibility that unemployed workers might migrate to this region.
In case the graph for international labour and the plotting of mobility was a percentage, the average lifetime rate of return on migration is positive. This is usually falling between 10 and 15 percent range. Out of this, the authors propose that labour mobility contributes to efficiency through relocation of human capital away from lower-valued towards higher-valued employment. It is clear from the chapter that under circumstances of perfect competition and costless migration, workers of a specific kind relocate until the value of marginal product of labour (VMP) is the same in all identical employments. At this point, labour allocates efficiently. However, there entails positive results of mobility and migration, there are also negative externalities. This negative externalise as indicated in the chapter may reduce the efficiency gains of migration in case they are real. Contrary to the real situation, if they are pecuniary, they may change the distribution of earnings among individuals and groups in origin and destination regions.
McConnell, Brue and Macpherson assert that wage differentials may create capital and product movements that seem to equalise wages in the end. This reduces the level of labour migration. From the bar graph above, it is indicative that the United States of America had averagely 650,000 incidences of migration and economic mobility during the 1980s. This increased to approximately 850,000 since 1992. The whole aspect is that illegal aliens in the country have no impact on the native employment negatively. However, they do depress wage rates in some labour markets.
Chapter 10: Labour Unions and Collective Bargaining
This chapter turns its focus from the usual discussion of the book on salaries and labour markets to look at the contribution of labour unions in collective bargaining. In the introductory section of the chapter, the writers of this book assert that labour unions are a result of industrialisation. Industrialisation changed the economy of the world from dominance expressed through self-employment to labour that depends on management for employment and wages. One in nine employees around the globe today belongs to a labour union. In addition, the chapter indicates that membership to the labour unions in the world today is relatively high in goods producing and public sectors, as opposed to the service producing and private sectors. The disparities attributes to industrial and occupational credentials of the three demographic groups. Similarly, it is clear that labour unions are strong and active in highly urbanised and industrialised regions.
The chapter then shifts to look at the structure of labour movements, which reveal three fundamental levels. These levels include the American Federation of Labour and Congress of Industrial Organisations, the Change to Win Federation, and the National Unions. The American Federation of Labour and Congress of Industrial Organizations (AFL–CIO) focuses on the formulation and expression of labour’s political perspectives and resolution of jurisdictional conflicts among national unions. The Change to Win Federation considers systematizing unorganized employees. The national unions confer joint bargaining accords and systematise employees. The job of overseeing bargaining agreements is primarily under the local unions. The chapter pays a close attention to the United States of America and their Unions.
The current trend in unionism indicates that there has been a considerable decline in the US. This has attracted analysis from some economists, who attribute this shift to the transformations in the composition of local output and demographic structure of the human capital. These factors have been uncongenial to the union development. Other economists suggest that corporations, supporting the fact that unionisation impacts negatively on profitability have been on the forefront in seeking both legal and illegal measures of dissuading employees from belonging to unions. The chapter moves into outlining the facts held strong by the monopoly union model. According to this model, the unions set the wage rate as the companies determine the level of the union employment in accordance to these wage rates. It is through the model that firms establish their firm’s labour demand curve.
This labour demand curve indicates how much work that companies demand at diverse wage rates. The negative slope has an implication that most firms prefer to cut down on employment if work becomes more expensive. When there is a comparison to the non-union results, the wage rate will be higher, and this undoubtedly lowers employment level. The chapter acknowledges that labour unions have a part to play in influencing wage rates. The unions can increase the wages for its members through an increased demand for labour, restriction of supply in labour and bargaining for equilibrium.
