6.4 The Determination Of Relative Wage Rates And Levels Of Employment In Imperfectly Competitive Labour Markets

Question 1

Wage differentials and labour market imperfections

Answer 1

• Wage differentials would not exist in a PCLM but because they do, implies LM imperfections

Question 2

Reasons for wage differentials

Answer 2

• Labour is not homogenous: (Different MRPs, Different supplies of labour, Discrimination)
• Non Monetary considerations: (Compensating wage differentials)
• Labour is not perfectly mobile: (Occupational immobility, Geographical immobility, Imperfect information)
• Trade unions and supply restrictions
• Monopsonies and wage setting ability

Question 3

How does monopsony power contribute to imperfections in a labour market?

Answer 3

• When there is only one buyer of labour in the market, there is said to be monopsony power (NHS, teachers)
• It means the firm have significant buying power so they have the ability to set wages
• Maximise revenue by hiring workers up to where MRP=MCL
• The marginal cost of adding an extra worker is more than the average cost.
• This is because in order to employ another employee the firm has to pay all of their workers more.
• At MC = MRP, the firm profit maximises.
• Wages and employment will be lower compared to competitive market outcomes
• EVAL/ANALYSIS POINT: In real life, the lower wages are, compared to the MRP the greater the monopsony power that exists in the market

Question 4

How does trade union power contribute to imperfections in a labour market?

Answer 4

• Trade unions can use collective bargaining for higher wages, increased job security and working conditions.
• If trade unions are pushing for higher wages above the market equilibrium, the labour market is likely to be more flexible.
• Higher wages can be demanded by limiting the supply of labour, by closing firms, or by threatening strike action.
• Higher wages could cause unemployment, however.
• Trade unions can counter-balance exploitative monopsony power.
• Diagram-most workers will be happy with the TU wage rate HOWEVER, beyond point A, if the employer wanted to employ more workers they would need to offer a higher wage rate

Question 5

Evaluate trade unions impact on LM

Answer 5

• TU in a monoposony LM would make things better=improve wages and increase employment
• Strenght of TU power (union density)=the higher the percentage of union density, then higher TU power
• Success determined by union mark up=if there is a large difference between the wages worker who are not striking in an industry are getting and the wages of those who are striking, then the higher the success of the trade union
• Real world evidence proves limited power of TU (1970)= margaret thatcher legislation against TU, restricting of UK economy, competitive pressures

Question 6

How does imperfect information contribute to imperfections in a labour market?

Answer 6

• Some qualified workers might not be aware of higher paying jobs in other industries or with other firms.
• Some workers might not understand the long term benefits of investing in improving their skills and education.
• This can limit the productivity and potential progression of workers.
• It makes the market inefficient.