The determination of relative wages and levels of employment in imperfectly competitive labour markets

Question 1

Define wage differentials

Answer 1

• The differences that exist in wages between different groups of workers, or between workers in the same occupation
• wage differentials would not exits in perfectly competitive labour markets. That they do exist implies labour market imperfections

Question 2

Why do wages differ? What does this suggest in the real world?

Answer 2

• If all labour markets were perfectly competitive, there would be no wage differentials at all
• Therefore, the existence of wage differentials between professions, genders and ethnic groups suggests labour market imperfections in the real world

Question 3

Give some market imperfections which explain why wage differentials occur

Answer 3

1. Labour is not homogenous
2. Labour immobilites and information is imperfect
3. Barriers to entry/exit
4. Trade unions
5. Monopsony power
6. Non - monetary conditions –> Compensating wage differentials

Question 4

Why does labour being homogenous explains why wage differentials occur?

Answer 4

• Labour is not homogenous in reality. Workers differ in a multitude of ways, including in their MRPs (their demand) and their suitability to work in given professions (different supplies) with varying skill sets and qualifications.
• This can lead to differences in pay between workers and between professions.
• Furthermore, workers vary in race, gender and age; an issue if employers use wage discrimination to offer different wages based on these individual characteristics. Though this practice is illegal, discrimination on these grounds can still take place.

Question 5

Why does labour immobilites and imperfect information explains why wage differentials occur?

Answer 5

• Labour immobilities can restrict the movement of labour away from and into certain professions allowing wage differentials between professions to persist.
• Occupational immobility of labour, where workers do not possess the skills to transfer jobs, can prevent workers taking jobs where wages are higher.
• Geographical immobility of labour will stop workers moving to areas where wages are higher.
• If information is imperfect, workers may not know about wages being higher in a different part of the country or in a different firm/profession.

Question 6

Why does barriers to entry/exit explain
why wage differentials occur?

Answer 6

• Barriers to entry and exit can be high enough to prevent the fluidity of the labour market.
• Barriers to entry into a profession: training periods, skills and qualifications
• Barriers to exit into a profession: notice periods or redundancy payments for employers
• These make it harder for workers to leave jobs where wages are low and take jobs where wages are higher.

Question 7

Define a trade union

Answer 7

• An organisation that aims to protect workers, secure jobs, improve working conditions, and try to achieve higher wages
• Trade unions use collective bargaining to restrict labour supply and fight for higher wages and greater employment threatening strike action from its members if the firm does not agree.

Question 8

Why do trade unions explain
why wage differentials occur?

Answer 8

• The existence of trade unions can push up wages beyond MRP and therefore cause wage differentials between professions where unions do and do not exist.
• This distorts efficient competitive labour market outcomes
• Successful unions will have a large mark up, the difference between the union wage and a non-union wage, providing a reason for the existence and persistence of wage differentials.

Question 9

Why can monopsony power explain why wage differentials occur?

Answer 9

• Employers that have monopsony power are able to set their own wages ignoring competitive wage rates given that there is little to no competition between firms when employing workers.
• Such employers can offer wages below MRP and competitive wage rates in order to profit maximise when hiring workers to the benefit of the employer at the expense of the worker.
• These lower wages can remain over time providing an explanation for persistent wage differentials.

Question 10

Why can non-monetary considerations –> compensating wage differentials explain why wage differentials occur?

Answer 10

• There may be compensating wage differentials to account for differences in job environments.
• For example workers that work in dangerous conditions or in professions working anti-social hours, wages can be higher to compensate (lack of supply of labour in those industries as it is less attractive to work in those conditions, therefore wages will be higher); a positive compensating wage differential.
• Whereas if professions provide certain luxuries (non-monetary benefits) such as the option to work abroad or excellent holiday periods, wages can be lower to compensate, a negative compensating wage differential.

Question 11

Define a monopsony

Answer 11

A sole dominant buyer of labour (in a given profession) that has the ability to set wages

Question 12

Give an example of a monopsony

Answer 12

• Teachers
• NHS (nurses)
  Both are emplyed by the state (who is the dominant employer of all workers in those two professions)