4.3 Perfectly competitive labour markets

Question 1

What are the 6 conditions for a perfectly competitive labour market?

Answer 1

• Many buyers of labour (i.e. firms)
• Perfect knowledge regarding wage rates, jobs available and conditions in the market
• Homogenous jobs
• Homogenous workers with the same experience and skills
• Many suppliers of labour (i.e. workers)
• Individual firms and workers have no impact on the wage level

Question 2

What are market forces?

Answer 2

Market forces are the interaction between the demand for and supply of labour

Question 3

What are wage differentials?

Answer 3

Wage differentials are the differences in wages that workers obtain for their services

Question 4

What reasons are there for wage differentials?

Answer 4

• Elasticity of supply
• Trade unions
• National minimum wage
• Human capital

Question 5

How can human capital lead to wage differentials?

Answer 5

• Skilled workers are likely to have a higher MRP than unskilled workers so are worth more to an employer
• Male workers are likely to have a higher MRP than female workers most likely due to more experience in the workplace as women take time off to have families

Question 6

Why does marginal revenue of workers differ geographically?

Answer 6

• Workers in London and other parts of the country might have the same MPP
• However, higher demand in London is likely to see higher prices per unit of output earned by the worker
• This leads to a higher marginal revenue for each unit of output produced making the worker more valuable