Wages in competitive markets

Question 1

The concept of equilibrium wages

Answer 1

The equilibrium wage refers to the wage rate at which the quantity of labor supplied by workers matches the quantity of labor demanded by employers. It represents the point at which the supply for labor and demand intersects, leading to a stable and balanced labor market. There are no labor shortages or surpluses and the market clears, there is no upward or downward pressure on wages.

Question 2

Conditions for competitive labor market

Answer 2

-Many buyers(employers) and sellers(workers)-
-Perfect information for employers and workers about jobs
-Homogenous labor-Worker skills and abilities are similar
-Mobility of labor-Can move between jobs or areas with no barriers
-No monopsony power

Question 3

Main causes of wage differentials

Answer 3

-Compensating wage differentials
-Reward for human capital
-Differences in labor productivity and revenue creation
-Trade unions that may use their collective bargaining power
-Artificial barriers to labor supply such as professional exams
-Employer discrimination

Question 4

Compensating wage differentials

Answer 4

Reward for risk taking, working in poor conditions and during unsocial hours

Question 5

Reward for human capital

Answer 5

Differentials compensate workers for the economic value of a workers experience and skill e.g. education, training and other qualities.

Question 6

Differences in labor productivity and revenue creation

Answer 6

Workers that have high efficiency and generate revenue for a firm often have higher pay

Question 7

Trade unions that may use their collective bargaining power

Answer 7

Helps to achieve a mark up on wages compared to non union members.

Question 8

Employer discrimination

Answer 8

Employers may perceive older workers as less able to learn new tasks, less flexible and less ambitious so will pay them lower wages