6.3 The Determination Of Relative Wage rates And Levels Of Employment In Perfectly Competitive Labour Markets

Question 1

The economists’ model of wage determination in a perfectly competitive labour market and the role of market forces in determining relative wage rates

Labour market Equilibrium

Answer 1

• Labour market equilibrium is determined where the supply of labour and the
  demand for labour meet.
• This determines the equilibrium price of labour

Question 2

The economists’ model of wage determination in a perfectly competitive labour market and the role of market forces in determining relative wage rates:

What happens when the demand for labour falls?

Answer 2

• In a PCLM when the demand for labour falls, such as during a recession, in a free market the wage rate would fall

Question 3

The economists’ model of wage determination in a perfectly competitive labour market and the role of market forces in determining relative wage rates:

What happens when the supply for labour increases?

Answer 3

• If the supply of labour increases, such as if the retirement age was raised, the wage rate would fall

Question 4

The economists’ model of wage determination in a perfectly competitive labour market and the role of market forces in determining relative wage rates:

What did Keynes suggest about wages in the labour market?

Answer 4

• in the real labour market, wages are not this flexible.
• Keynes coined the phrase ‘sticky wages’.
• Wages in an economy do not adjust to changes in demand
• The minimum wage makes wages sticky and means that during a recession, rather than lowering wages of several workers, a few workers might be sacked instead