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

Key causes of labour market imperfections

• Monopsony power: Asingle or dominant buyer of labour.

• Trade union power: Workers act collectively to negotiate higher wages than the market equilibrium

• Imperfect information: Workers may not know about higher paying jobs elsewhere.

• Labour immobility: Workers cannot easily move between jobs or locations, giving local firms more power.

Wage & employment determination in a monopsony

The marginal cost of labour (MCL) sits above the average cost of labour (ACL) curve because hiring one more person increase the total wage bill significantly.

Profit maximising level is where (MRP) = (MCL)

Causes lower employment than competitive equlibrium. Lower wages, firm pays lowest wage workers are willing to accept.

The role of trade unions

Aim to protect jobs and increase wages

Competitive market impact: If a union forces wages above equilibrium, can cause job losses.

Bilateral monopoly: When a strong trade union a monopsony employer, the outcome is unpredicatable and depends on bargaining power.

Determination of relative wage rates

• Skill level

• Geographical differences: wages often higher in areas such as London due to higher demand and higher costs of living.

• Discrimination: Age, gender, ethnicity

• Public vs private sector