12. Labour Markets - Wage Differentials & Market Imperfections

Question 1

What implies that there are imperfections in the labour markets?

Answer 1

The fact that there are wage differentials - lawyers & bus drivers aren’t payed the same therefore labour markets aren’t perfectly competitive

Question 2

What creates wage differentials?

Answer 2

1. Labour isn’t homogenous 2. Non-monetary considerations3. Labour isn’t perfectly mobile4. Trade Unions & Supply restrictions 5. Monopsonies and wage setting abilities

Question 3

How does differentiated labour create wage differentials?

Answer 3

Differentiated labour - different MRPs - different wagesDifferentiated labour - different supply of labour - different wagesDifferentiated labour - discrimination - different wages

Question 4

How do non-monetary considerations create wage differentials?

Answer 4

In the real world workers base there decision to supply labour on more than just wages - non-monetary considerations may influence the supply of labour - causing wage differentials

Question 5

How does immobility of labour create wage differentials?

Answer 5

Geographical Immobility, Occupational Immobility and Imperfect Information mean that people may not be able to transfer to an industry with rising real wages - supply stays low - wages stay higher than other professions - wage differentials

Question 6

How might trade unions create wage differentials?

Answer 6

Trade Unions can bargain on behalf of workers to force employers to pay them higher wages - this will distort the wages payed to workers and create differentials

Question 7

How might monopsonies with wage setting abilities create wage differentials?

Answer 7

Industries in which there is one dominant firm with wage-setting abilities may see wages driven down by that firm - wage differentials