Labour Markets Structures

Instead of every firm being part of the supply curve, think here that every firm is part of the demand curve for labour. All the MRP’s added up rather. Both slope downwards for pretty much the same reasons, and their elasticities are pretty similar. Elasticities is important, one of the main explanations for different earnings in diff professions(and diff markets). Here I will show the main ones needed for the course with examples……

Perfectly Competitive Labour Market.

Here, the market wage will stay fairly similar independent of how high demand is from the firms. When firms as a whole demand more labour(as more MRP demand), only employment will have changed at the new equilibirum. Why, well we need to think of what makes a perfectly competitive market. Just like a competitive goods market, but with labour. Everything bold are assumptions of such market.

The supply to the firm is horizontal(perfectly elastic). All workers will supply to a firm for the same wage. This is because all workers here are homogenous in skill(the same, picture them as robots). The employer has access to a large labour pool as there are many workers, employers in the market and has perfect knowledge of the pool of labour available(hence knows they are all equal, and the general wage). What this means is eventually, all workers will be working for the minimum needed to keep them in the market, which is assumed to be the same(before they will just enter another market, or not work at all). This is why: Say a demanding worker comes along, who will not work for the wage others will. The employer will probably tell him to just get lost, as they can get less demanding workers, equally as good, at ease because of the large pool and knowledge. So to get a job, you must lower you’re expectations, but there will always be one who underbids you’re wage, and gets hired. In the end, all workers, after underbidding, will demand a certain minimum which is the same. Any lower then they know they can get better in another competitive market, any higher than the above occurs. The firm knows of this, and sets their hiring wage at that level, the lowest they can whilst getting labour.


This minimum will stay the wage, and is because there are no barriers to entry for labour. If a worker wants to supply here, they do not need any qualifications, not even any previous experience. Pretty much anyone can work here(it is easy to see why the wage is so low). So say the demand for such a job rises, as industry is booming. Workers are demanded more, and any wage rise will be short lived. Almost instantly, labour elsewhere will notice the higher wage, enter easily(supply will shift too) until the wages are bidded down again to this minimum. This follows another assumption, labour is perfectly mobile to where needed.

In reality, there are no markets exactly like this. There is always some imperfect knowledge of job vacancies for workers, aswell as who to employ(who can do the best job) for instance. But there are examples close to this(which is why it holds good)……Cashiers, General Assitants, Cleaners and those who read scripts at call centres.

So why arent wages all the same in such markets Because surely, if one was higher, labour would flock there until it all equalled out??. This is where net advantage comes into play, which is the actual incentive to supply(which we neglect in basic explanation, and you do not need it in you’re A level, but useful). Different jobs have different job satisfaction, and high paid ugly jobs will give you the same incentive as a low paid enjoyable job. So some need higher pay than others to give same supply incentive(it is supply incentive equalling out). Trade unions(looked below) have more power in some than other markets too. Higher wages are forced sometimes in markets with more unionship.

Imperfect Labour Markets.

These are generally those which are higher earning(but not always), and do not have the characteristics(above in bold) of a perfect labour market. The most important is it has barriers to entry for the labour supplying. Labour now must have certain skills/qualifications/experience to put thir services up. Labour long run supply is now inelastic, for both firms and the market. Scarcity of such labour makes inelasticity.

Such jobs include law, financial services, entreprenuers, scientists etc. Demand can be quite inelastic too, as in such jobs no more than a few are needed, notably CEO’s, top football players(1GK is good 2 for sub, but 4 not needed) tending to perfect inelasticity sometimes. Only one is needed here which is very high paid, leader etc.

Monopsony Labour Markets.

This is where there is one employer in a labour market, and they are the full market demand(their MRP curve is the demand curve for all). Many workers are in the supply pool to one employer. Supply curve is the average cost curve that employer faces(as is to wage), and epmloyer faces market supply curve.

A lower wage and number are employed in this market if unregulated. Employment is up to where MRP=Marginal Cost of Labour. Look how fast MC is rising though! Think though, to get one more worker for you(to enter market), you need to raise the wage to induce them. But the extra cost to hire one more is not just their risen wage. If you have been working somewhere for years and a new guy comes along earning more than you for doing the same job, just for the reason that he will not get out of bed for you’re wage, you will be angry. So will all the other employees, it cannot be done. The wages of the already hired staff must rise too the same or there are huge disputes. So the extra cost of getting that worker is a higher salary for one, and rises to that salary for all the other staff, giving a big MC. Hiring too many workers in this situation is not too profitable, unlike when there are many hirers.

Monopsonies are rare in reality, really the government and some specialist professions are ones to quote.

Monopoly/Unionised Labour Markets.

One supplier of labour in the market. A trade union can be seen as this, as workers collect into one unit and act as a sole supplier of labour. Some markets in reality are like this, where to supply in a profession you must belong to the main union(a closed shop). They all rigidly agree to not work when the wage goes below a certain value(STRIKES, although they need a majority agreement by ballot from all members that they want to strike since the mid 1980’s).

It is easy to see that the workers have more power over fixing wages/working conditions than the employers. For if they do not accept what the unit of supply asks, they have no workers at all, and this can really hurt an industry when it is one people depend upon(such as coal 1970’s, no coal, no power, and the Royal Mail). How they negotiate, they do this by collective bargaining, where a representative of the union negotiates with the employer for what the union wants. Sometimes, the union can have too much power, and negotiate a wage which the employer cannot afford. The MRP of some workers can become less than the wage offered, and to survive, the employer must offload some unfortunate few to satisfy the wants of others. Also, people will hear about the power they enjoy if they worked for, say, the Royal Mail, and want to work for a constrained employer. Excess supply can result.

What makes some unions more powerful than others?

Basically its power is shown by the wage increase it can bargain above the market wage if they weren’t there(the trade union mark up). These include the elasticity of demand for labour. If inelastic, and the union can exploit this(what defines labour elasticity is shown in labour markets). Also how high a percentage of the workers are in the union(the union density, if they only risk some strikes, more employer power), the willpower of the union to get what they want(the union militancy) and the profitablility of the employer.

Minimum Wage Markets give a similar result, as trade unions are also assumed to give a minimum wage as above. Like unions, minimum wage labour markets can have excess supply of labour for typically very low paid jobs with elastic demand and supply. The National Minimum Wage was introduced in the UK in the late 1990’s which is enforced by law. It has attempted to increase the supply of labour to overcome immobilities, and for fairness reasons(inequality policy). The argument againt it is the excess supply possibility.


One Response to Labour Markets Structures

  1. Pingback: My Space. « Zahablog's Economic Page

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