4.1.6.3 - Perfectly competitive labour markets

Characteristics/Assumptions of Perfectly Competitive Labour Market

• Very large number of workers

• Workers are homogeneous

• Firms maximise profits, hiring workers up to MRP=MC

• No barriers to entry for workers

• Price-taking - no firm or worker can influence ruling wage rate

• Perfect information about workers’ skills; working conditions, outside wages

• Large number of firms/employers

Diagram for Perfectly Competitive Labour Market (Firm & Industry)

Why is Supply Horizontal for Firms in Perfectly Competitive Labour Markets?

• In competitive labour market, each firm can only hire workers if they offer the market-clearing wage rate, because if they offered less, they would work at other rival firms instead. → Supply curve is horizontal

• (firms are wage-takers)

Labour Market for High-Skilled Job vs Market for Low Skilled-Job (Diagrams + Chain of Analysis)

For this example, High-Skilled = Lawyer, Low-Skilled = McDonald’s Worker

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Elasticity of Supply:

• Supply of Lawyers is more inelastic - More barriers to entry, like rigorous qualification exams, education - need degree, training.

• Whereas, supply of McDonald’s workers is elastic - low entry requirements - no education needed, little training

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Labour Demand:

• Demand for Lawyers exists at much higher wages - Lawyers produce higher MR → higher MRP → firms more willing and able to hire lawyers

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→ Equilibrium Wage for Lawyers is higher at W1 compared to W2 for McDonald’s workers