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

what are the characteristics of a perfectly competitive labour market

many, small firms

Many, homogenous workers

perfect information about wages and jobs

perfect mobility of labour

firms and workers are wage takers

at what point do firms opperate

MRP = MC

why do firms opperate at MRP = MC

this is where the marginal benefit of employing an additional unit of labour is the same as the marginal cost of employing the additional unit of labour

what happens when MRP > MC

each additional worker is adding more than they cost, therefore hiring more increases profit until MRP = MC (profit max)

What are relative wage rates/wage differentials

the differences in wages between different occupations, industries or skill levels

describe the role of market forces in determining relative wage rates

The interaction of demand and supply determines the wage rate in a particular occupation.

Where labour is highly productive/value of finished good is high → MRP is higher → strong demand

where there are scarce skills or long training periods → less attractive → reduce supply

leading to relatively high wages

demonstrate supply and demand diagrams

In perfect labour markets, Wages are determined by the interaction of

demand for labour and supply of labour

equilibrium wage

refers to the point where supply and demand of labour intersect. At this point the market clearsa and there are no surpluses or shortages and no upward or downward pressure on wages

what can lead to a higher MRP

higher value of final good/service

higher productivity

increased demand for final good/service

example of a perfect labour market

market for fruit pickers in southern spain

many firms, many homogenous workers, wage takers due to comp

but lack of perfect information, and mobility

evaluation on perfectly competitive labour markets

Perfectly competitive markets don’t exist, all real-world markets are imperfectly competitive but to a to a greater or lesser extent. Meaning the model should only be used as one end of a spectrum for comparisons

why does AC = MC in perfect labour markets

workers are homogenous so every worker is paid the same