3.3. Wage Determination in a Labour Market and Perfect Imperfect Labour Market Flashcards
Labour Market Equilibrium Curve (DRAW)
- y-axis - real wage rate
- x-axis - quantity of labour
- demand of labour = MRP
- supply of labour
- equilibrium where demand and supply intersects
Equilibrium in Labour Markets
when the demand for labour is equal to the supply of labour, the labour market clears and there is no tendency for change.
Why are there changes in market wages
- Shifts in the demand for labour
- Shifts in the supply of labour
Causes of shifts in the demand for labour
- Change in productivity of labour
- Change in price of the product
- Change in demand for the product
- Change in the price of a substitute for labour
Causes of shifts in the supply for labour
- Change in the non-monetary factors in that labour market
- Change in the wage rates and non-monetary factors in other labour markets
- Change in the size of the labour force of the whole economy
Economic rent and Transfer earnings on the Labour Market Equilibrium Curve (DRAW)
- Economic rent in the same place as producer surplus
- Transfer earnings the triangle below that
Economic Rent
the extra payment received by a factor of production above what is needed to keep it in its present use.
Transfer Earnings
the minimum payment needed to keep a factor of production (e.g. labour) in its current use.
Economic Rent and Transfer Earnings when there is Elastic Supply of labour
Majority of the wage is made up of transfer earnings
Economic Rent and Transfer Earnings when there is Inelastic Supply of labour
Majority of the wage is made up of economic rent.
Economic Rent and Transfer Earnings when there is Perfectly Elastic Supply of labour
All of the wage is made up of transfer earnings.
Economic Rent and Transfer Earnings when there is Perfectly Inelastic Supply of labour
All of the wage is made up of economic rent.
Wage determination in a perfect labour market
1) Many workers, many small firms, all with no market power.
2) Firms are profit maximisers (MRP = MCL)
3) Workers are homogeneous (identical) and perfectly mobile
4) Workers and firms have perfect knowledge of market conditions
5) Workers and firms are wage takers – they accept the market wage.
6) No government intervention, no trade unions and no monopsony.
Oerfect labour market curve (DRAW)
- y-axis - wage
- x-axis - quantity of labour
- MCL is set equal to the market wage equilibrium
- W = MCL = ACL = S
- MRP drawn
- For profit maximisation set quantity where MRP = MCL
- When MRP > wage = they can increase profits by employing more
- When MRP < wage = they can increase profits by employing less
High wages (wage differentials)
1) High demand for labour: due to high marginal revenue product (MRP).
2) Inelastic demand for labour: difficult to replace, inelastic PED for product.
3) Low supply of labour: labour is very scarce.
4) Inelastic supply of labour: high skilled, a lot of training, difficult / high risk job.
Low wages (wage differentials)
1) Low demand for labour: due to low marginal revenue product (MRP).
2) Elastic demand for labour: easy to replace, elastic PED for product.
3) High supply of labour: labour is abundant.
4) Elastic supply of labour: low skilled, little / no training, easy / low risk job.
Government minimum wage
the lowest wage by law that can be legally
paid to labour
- set above the labour market curve equilibrium
Government minimum wage diagram (DRAW)
y-axis = real wage rate x-axis = quantity of labour
Before minimum wage:
- W* = wage
- Q* = quantity
- 0W*e = Economic rent
- 0eQ* = Transfer earnings
After minimum wage:
- Wmin = minimum wage
- s = quantity
- 0Wminca = economic rent
- 0as = transfer earnings
- ace = welfare loss
Supply curve is WminbS
Trade Union
an organisation representing workers that tries to improve wages, working conditions and worker rights through “collective bargaining”.
Trade Union Aims
- Negotiate on behalf of its members.
- Higher pay.
- Better working conditions.
- Protect against unfair dismissal.
- Promote workplace training.
- Protect worker pensions.
Trade Union Diagram (DRAW)
bascially same of minimum curve diagram
- but instead of Wmin it is Wtu
Trade Union other diagram - supply (DRAW)
y-axis = real wage rate
x-axis = quantity of labour
- supply of labour shifting left
What determines the strength of a trade union
1) Size of the trade union:
- larger size → more TU power.
2) Trade union membership as a proportion of total market labour supply:
- higher proportion → more TU power.
3) Elasticity of demand for labour / product:
- inelastic demand for labour / product → more TU power.
Profitability of the employer:
- more profitable → more TU power.
Monopsony
a single buyer in a market (i.e. the only employer in a labour market) e.g. government is a monopsony employer of police.
Monopoly vs Monopsony
Monopoly - A single seller in a market. - Sell at high prices Monopsony - A single buyer in a market. - Buy at low prices.
Monopsony Diagram (DRAW)
y-axis = real wage rate x-axis = quantity of labour - SL = ACL curve - DL = MRP curve - MCL curve - quantity of labour set to profit maximising condition (MCL = MRP) - both quantity labour and wage rates low, below equilibrium - there is welfare loss
Wm < Wplm
- A monopsonist pays a lower wage than a perfect labour market
Qm < Qplm
- A monopsonist employs fewer workers than a
perfect labour market.
Bi-lateral monopoly
a market structure where there is a monopsony (only buyer) and a monopoly (only seller, i.e a trade union).
Bi-lateral Monopoly Diagram (DRAW)
y-axis = real wage rate x-axis = quantity of labour - SL = ACL curve - DL = MRP curve - MCL curve - Wtu wage set by trade union is set below equilibrium - wages become higher - both quantity labour and wage rates low, below equilibrium - there is welfare loss
Wm < Wtu
- A trade union will increase wages in a monopsony labour market.
Qm < Qtu
- A trade union will increase employment in a monopsony labour market.
