Imperfections in the Labour Market Flashcards
Why are labour markets rarely perfectly competitive in the real world?
This is because workers or firms usually have the power to set and influence wages and therefore wages may be set to levels different than anticipated by Marginal Revenue Product (MRP) theory.
Imperfections in the labour market cause wages to differ from a competitive equilibrium
1 Name some imperfections in the labour market
- Monopsony
Monopsony occurs when there is just one buyer of labour in a market. This gives the firm market power in employing workers. The monopsony can set (lower) wages and limit the quantity of workers.
i.e. a company coal town, where the coal company acts the sole employer and therefore the sole purchaser of labor in the town.
Graphically depict what a monopsony looks like
The marginal cost of employing one more worker will be higher than the average cost because to employ one extra worker the firm has to increase the wages of all workers.
To maximise the level of profit the firm employs Q2 of workers where MC = MRP
Therefore the firm only has to pay a wage of W2. This is less than the competitive wage.
Can monopsony power still exist even when there is more than one employer?
Even if there is more than one employer, firms may still have the ability to set wages and have a degree of monopsony power.
For workers, there are significant costs and difficulties in moving between employers. This means that if wages are low, it is costly to give up the job and work for a firm with slightly higher wages.
2 Name some imperfections in the labour market
- Trades Unions
Under certain conditions, Trades unions can bargain for wages above the competitive equilibrium
This can be achieved by restricting the supply of labour (e.g. closed shops) or threatening to go on strike.
Graphically depict how trade unions cause higher wages
Trades Unions can cause higher wages, however, in competitive markets, this can have the effect of causing unemployment of Q1 – Q2
How can trade unions be beneficial?
if:
They operate in an industry with a Monopsonistic employer
They help to increase productivity by bringing in new working practices
Demand for labour is inelastic
Efficiency wage theories – when higher wages lead to higher productivity.
3 Name some imperfections in the Labour market
- Firms may be non-profit maximisers
If demand for a product falls, MRP theory suggests wages are likely to fall. However, firms may be reluctant to cut wages or make people redundant therefore they may keep paying high wages despite this
4 Name some imperfections in the Labour Market
4 Wages will vary due to geographical differences
In the north (e.g. Sunderland), wages tend to be lower because there are less demand, higher unemployment and more elastic supply curve of labour. In the South, wages tend to be higher for the opposite reason – firms are more profitable and are willing to pay higher wages.
What geographical immobilities might stop workers moving from north to south in order to take advantage of better work oppurtunities?
Workers have attachments to their local communities – friends, children at local schools.
Difficult to find housing in the south.
Poor information about jobs elsewhere
5 Name some imperfections in the labour market
- Occupational immobilities
Even at periods of full employment (strong economic growth) workers can be unemployed due to occupational immobilities.
This involves having inadequate skills for the labour market. In a fast-changing economy, some workers can be left behind when old industries close down and their former skills are not transferable to new jobs.
For example, manual workers from manufacturing may struggle in a high tech service sector based economy. This can lead to structural unemployment
6 Name some imperfections in the Labour market
6 Poor information
Workers or firms may suffer from poor information. E.g. workers may be unaware of better-paid jobs elsewhere. Poor information is one factor that enables firms to have monopsony power
