Wage determination in the labour market 3.5.3

What is meant by 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

On a curve, how is the equilibrium wage shown?

The point where the supply of labour and demand for labour intersect

What are the conditions for a competitive labour market?

• Many buyers (employers) and sellers (workers)- no single employer or worker has significant market power

• Perfect information- job opportunities, wage rates, working conditions

• Homogeneous labour- skills and abilities are similar#

• Mobility of labour- movement from jobs

• No monopsony power

When does monopsony power occur in the labour market?

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

What are main causes of wage differentials?

• Compensating wage differentials- a reward for risk taking, poor conditions and unsocial hours

• Reward for human capital

• Differences in labour productivity and revenue creation

• Trade unions who might use their collective bargaining power to achieve a mark-up on wages compared to non-union members

• Artificial barriers to labour supply such as professional exams, migration control

• Employer discrimination- employers may see older workers as less able to learn new tasks so pay lower wages.