The determination of relative wage rates and levels of employment in perfectly competitive labour market

Question 1

Give the characterisitics of a perfectly competitive labour market

Answer 1

1. many workers and employers
2. labour is homogenous
3. no barriers to entry/exit
4. firms are wage takers
5. many workers and empolyers
6. perfect information & mobility of labour
7. Firms are profit maximisers

Question 2

What is the difference between the labour market model we use and the real labour market?

Answer 2

• Keynes described ‘sticky wages’ - wages in an economy do not adjust quickly or easily to changes in demand
• the minimum wage makes wages sticky and means that during a recession, rather than lowering the wages of several workers, a few workers may be sacked instead

Question 3

Give the outcomes in a perfectly competitive labour market (from diagram)

Answer 3

1. Wage = MRP - workers are paid according to their MRP
2. Employment is maximsied at Q1 - Competitive labour markets provide maximum job opportunities for workers to enter work –> efficient employment
3. No wage differentials between professions given perfect labour mobility and no barriers to entry/exit
4. Markets are flexible with perfect labour mobility of labour and easy hiring/firing for firms

Question 4

Why do wages differ? / What are some labour market imperfections?

Answer 4

1. Labouor is no homogenous
2. Labour is not perfectly mobile & info is imperfect
3. Barriers to entry/exit
4. Existence of trade unions
5. Monopsony power
6. There may be compensating wage differentials