Wages in competitive labour markets Flashcards
The concept of equilibrium wages
In labour market economics, the equilibrium wage refers to the wage rate at which the quantity of labour supplied by workers matches the quantity of labour demanded by employers.
It represents the point at which the supply of labour and the demand for labour intersect, leading to a stable and balanced labour market.
This means, at the equilibrium wage, there are neither labour shortages nor surpluses in the market. The market clears, and there’s no upward or downward pressure on wages.
Conditions for a competitive labour market
Many buyers(employers) and sellers(workers): No single employer or group of employers has significant market power to set wages or dictate working conditions.
Perfect information: Both employers and workers should have access to accurate and complete information about job opportunities, wage rates, and working conditions.
Homogeneous labour: In a perfectly competitive labour market, workers are considered homogeneous, meaning their skills and abilities are similar. This allows for easy substitution of one worker for another, reducing the potential for wage discrimination.
Mobility of labour: Workers should have the ability to move from one job to another, or from one geographic area to another without facing excessive barriers.
No Monopsony power: This occurs when a single employer or small group of employers dominate a labour market, giving them the ability to set wages below the competitive level.
Examples of industries within a monopsony
The NHS, police force, army, teachers
Main causes of wage differentials
Compensating wage differentials - a reward for risk-taking, working in poor conditions and during unsocial hours
Reward for human capital(human capital involves skills/education)- differentials compensate workers for (opportunity and direct) costs of human capital acquisition
Differences in labour productivity and revenue creation - workers whose efficiency is high and generate revenue for a firm often have higher pay
Employer discrimination - employers may perceive older workers as less able to learn new tasks,less flexible and less ambitious:
and pay lower wages
Trade unions(e.g. BMA for doctors), who might use their collective bargaining power - to achieve a mark up on wages compared to non-union members
Why are mean earnings greater than median earnings in the UK?
If the pay of a small fraction of individuals at the top end of the income spectrum are exceptionally high, it can result in a higher mean earnings figure. For example, the super high earnings of many UK CEOs. Median earnings of FTSE-100 CEOS in 2022 was £3.4 million.
