Two-part wage structures

Abstract

According to the monopsony model, a firm facing an imperfectly competitive labor market will hire an amount of labor such that the marginal revenue product will equal the marginal factor cost. However, if the firm can use a twopart wage structure, the result is substantially different, to the benefit of both firm and employees. This article develops the theory of a two-part wage structure, which is the labor market analogue of a two-part tariff. A two-part wage structure arises whenever the employment transaction between a firm and its workers involves a payment by the worker to the firm upon beginning employment and a payment by the firm to the worker each period thereafter for labor received. As with two-part tariffs, there are circumstances under which an ideal result holds: even in imperfectly competitive labor markets, firms would pay a wage equal to the marginal revenue product (and receive all gains from the market situation through the workers' initial payments to the firm). Two-part tariffs arise in many economic contexts [1, 2, 3, 4, 5]. For example, W. Oi [5] has examined the pricing problem of an amusement park which sells admission tickets and ride tickets in imperfect competition. The standard twopart tariff result holds for the amusement park: it charges a group of identical consumers a price on rides equal to the marginal cost, and collects all profits from imperfect competition through the lump-sum admission fee. This solution maximizes park profits since the admission fee does not distort the consumer's choice between rides and other goods. The maximum consumer's surplus is extracted with this two-part tariff.