Economics
Imperfectly Competitive Labour Market
An imperfectly competitive labor market refers to a market where employers or workers have some degree of market power, leading to wages and employment levels that differ from those in a perfectly competitive market. This can result from factors such as barriers to entry, monopsony power, or labor unions. In such markets, wages and employment levels may not be determined solely by supply and demand.
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10 Key excerpts on "Imperfectly Competitive Labour Market"
eBook - ePub- Orley Ashenfelter, David Card(Authors)
- 2010(Publication Date)
- North Holland(Publisher)
Chapter 11 Imperfect Competition in the Labor MarketManning Alan1 , Centre for Economic Performance, London School of Economics, Houghton Street, London WC2A 2AEAbstract
It is increasingly recognized that labor markets are pervasively imperfectly competitive, that there are rents to the employment relationship for both worker and employer. This chapter considers why it is sensible to think of labor market as imperfectly competitive, reviews estimates on the size of rents, theories of and evidence on the distribution of rents between worker and employer, and the areas of labor economics where a perspective derived from imperfect competition makes a substantial difference to thought.Keywords
Imperfect competition; Labor markets; Rents; Search; Matching; MonopsonyIntroduction
In recent years, it has been increasingly recognized that many aspects of labor markets are best analyzed from the perspective that there is some degree of imperfect competition. At its most general, “imperfect competition” should be taken to mean that employer or worker or both get some rents from an existing employment relationship. If an employer gets rents, then this means that the employer will be worse off if a worker leaves i.e. the marginal product is above the wage and worker replacement is costly. If a worker gets rents then this means that the loss of the current job makes the worker worse off—an identical job cannot be found at zero cost. If labor markets are perfectly competitive then an employer can find any number of equally productive workers at the prevailing market wage so that a worker who left could be costlessly replaced by an identical worker paid the same wage. And a worker who lost their job could immediately find another identical employer paying the same wage so would not suffer losses.A good reason for thinking that there are rents in the employment relationship is that people think jobs are a “big deal”. For example, when asked open-ended questions about the most important events in their life over the past year, employment-related events (got job, lost job, got promoted) come second after “family” events (births, marriages, divorces and death)—see Table 1 for some British evidence on this. This evidence resonates with personal experience and with more formal evidence—for example, the studies of Jacobson et al. (1993) and Von Wachter, Manchester and Song (2009) all suggest substantial costs of job loss. And classic studies like Oi (1962)
eBook - PDF- Howard M. Wachtel(Author)
- 2013(Publication Date)
- Academic Press(Publisher)
Market Structure and Wage-Employment Determination The several different types of market structure discussed in this chapter have been summarized in Table 5-3, and the deviations in wage-employment deter-mination from the perfectly competitive norm are indicated. Imperfect com-petition in product markets and the kinked-demand oligopoly model produce the same wage rate as in perfect competition, but the employment outcome is different. Under conditions of imperfect competition, employment is lower, and with the kinked-demand-curve oligopoly model, employment is constant over some range of wage rates. Monopsony in the labor market produces both a lower wage rate and lower employment levels compared with the outcome under perfect competition. Summary Three models that relax the assumption of perfect competition have been pre-sented in this chapter: imperfect (or monopolistic) competition, oligopolistic competition, and monopsonistic competition. The first two permit economic concentration to prevail in product markets, while monopsonistic competition refers to a condition that deviates from perfect competition in the labor market. The model of imperfect competition yields a demand-for-labor curve that deviates from the demand curve of perfect competition. The marginal revenue product of labor curve lies below the value of the marginal product of labor at all levels of employment, because the firm's marginal revenue from the sales of its products lies below its average revenue per unit of sales. This produces a situation in which employment is less than it would have been for the same wage rate under perfect competition. 17 Many of these applications were first introduced in Gordon F. Bloom, A Reconsideration of the Theory of Exploitation, Quarterly Journal of Economics (May 1941), pp. 413—42.
- Tito Boeri, Jan van Ours(Authors)
- 2021(Publication Date)
- Princeton University Press(Publisher)
The mar-ket is transparent, workers and firms are perfectly informed about wages and labor services offered by other workers-firms, and there are no fric-tions or costs (e.g., no time related to job search and no transportation costs when going to job interviews) involved in the matching of workers and vacancies—that is, of labor supply and demand. 1.3.2 An Imperfect Labor Market An imperfect labor market is one where there are rents associated with any given job so that the total surplus of the marginal job is positive. Rents may arise, for instance, because of frictions in the labor market, preventing workers from costlessly changing jobs. Wages are, in this context, a rent-splitting device. They decide which fraction, if any, of the surplus goes to the employer and which fraction, if any, goes to the worker. In an imperfect labor market wage setting is therefore of paramount importance. Depending on the market power of employ-ers or workers, wages can bring either one of the two surpluses to zero while allowing the other party to enjoy a rent. The above implies that at 1.3. Labor Market Equilibrium 21 least for one of the parties involved in the employment relationship, job destruction is a big deal—it involves a loss. Imperfect labor markets are associated with frictions, informational asymmetries, or market power at least on one of the two sides of the mar-ket. These imperfections are often interrelated. For instance, as discussed in chapter 2, it is mainly labor market frictions that convey monopsony power to employers, allowing them to pay wages lower than the value of the marginal productivity of labor, as these frictions prevent workers from costlessly changing jobs. Informational asymmetries also prevent the attainment of labor market equilibria in which the total surplus is maximized.
eBook - PDF- Steven A. Greenlaw, Timothy Taylor, David Shapiro(Authors)
- 2017(Publication Date)
- Openstax(Publisher)
Like all equilibrium prices, the market wage rate is determined through the interaction of supply and demand in the labor market. Thus, we can see in Figure 14.7 for competitive markets the wage rate and number of workers hired. The FRED database has a great deal of data on labor markets, starting at the wage rate and number of workers hired (https://openstax.org/l/cat10) . The United States Census Bureau for the Bureau of Labor Statistics publishes The Current Population Survey, which is a monthly survey of households (link is on that page), which provides data on labor supply, including numerous measures of the labor force size (disaggregated by age, gender and educational attainment), labor force participation rates for different demographic groups, and employment. It also includes more than 3,500 measures of earnings by different demographic groups. Chapter 14 | Labor Markets and Income 325 The Current Employment Statistics, which is a survey of businesses, offers alternative estimates of employment across all sectors of the economy. The link labeled "Productivity and Costs" has a wide range of data on productivity, labor costs and profits across the business sector. 14.2 | Wages and Employment in an Imperfectly Competitive Labor Market By the end of this section, you will be able to: • Define monopsony power • Explain how imperfectly competitive labor markets determine wages and employment, where employers have market power In the chapters on market structure, we observed that while economists use the theory of perfect competition as an ideal case of market structure, there are very few examples of perfectly competitive industries in the real world. What about labor markets? How many labor markets are perfectly competitive? There are probably more examples of perfectly competitive labor markets than perfectly competitive product markets, but that doesn’t mean that all labor markets are competitive.
eBook - PDF- Steven A. Greenlaw, David Shapiro, Daniel MacDonald(Authors)
- 2022(Publication Date)
- Openstax(Publisher)
What about labor markets? How many labor markets are perfectly competitive? There are probably more examples of perfectly competitive labor markets than perfectly competitive product markets, but that doesn’t mean that all labor markets are competitive. When a job applicant is bargaining with an employer for a position, the applicant is often at a disadvantage—needing the job more than the employer needs that particular applicant. John Bates Clark (1847–1938), often named as the first great American economist, wrote in 1907: “In the making of the wages contract the individual laborer is always at a disadvantage. He has something which he is obliged to sell and 14.2 • Wages and Employment in an Imperfectly Competitive Labor Market 331 which his employer is not obliged to take, since he [that is, the employer] can reject single men with impunity.” To give workers more power, the U.S. government has passed, in response to years of labor protests, a number of laws to create a more equal balance of power between workers and employers. These laws include some of the following: • Setting minimum hourly wages • Setting maximum hours of work (at least before employers pay overtime rates) • Prohibiting child labor • Regulating health and safety conditions in the workplace • Preventing discrimination on the basis of race, ethnicity, gender, sexual orientation, and age • Requiring employers to provide family leave • Requiring employers to give advance notice of layoffs • Covering workers with unemployment insurance • Setting a limit on the number of immigrant workers from other countries Table 14.4 lists some prominent U.S. workplace protection laws. Many of the laws listed in the table were only the start of labor market regulations in these areas and have been followed, over time, by other related laws, regulations, and court rulings.
eBook - PDF- Steven A. Greenlaw, Timothy Taylor, David Shapiro(Authors)
- 2017(Publication Date)
- Openstax(Publisher)
Like all equilibrium prices, the market wage rate is determined through the interaction of supply and demand in the labor market. Thus, we can see in Figure 14.7 for competitive markets the wage rate and number of workers hired. The FRED database has a great deal of data on labor markets, starting at the wage rate and number of workers hired (https://openstax.org/l/cat10) . The United States Census Bureau for the Bureau of Labor Statistics publishes The Current Population Survey, which is a monthly survey of households (link is on that page), which provides data on labor supply, including numerous measures of the labor force size (disaggregated by age, gender and educational attainment), labor force participation rates for different demographic groups, and employment. It also includes more than 3,500 measures of earnings by different demographic groups. Chapter 14 | Labor Markets and Income 323 The Current Employment Statistics, which is a survey of businesses, offers alternative estimates of employment across all sectors of the economy. The link labeled "Productivity and Costs" has a wide range of data on productivity, labor costs and profits across the business sector. In summary, union membership in the United States is lower than in many other high-income countries, a difference that may be due to different legal environments and cultural attitudes toward unions. 14.2 | Wages and Employment in an Imperfectly Competitive Labor Market By the end of this section, you will be able to: • Define monopsony power • Explain how imperfectly competitive labor markets determine wages and employment, where employers have market power In the chapters on market structure, we observed that while economists use the theory of perfect competition as an ideal case of market structure, there are very few examples of perfectly competitive industries in the real world.
eBook - PDFMonopsony in Motion
Imperfect Competition in Labor Markets
- Alan Manning(Author)
- 2013(Publication Date)
- Princeton University Press(Publisher)
Much of a firm’s labour force is likely, for this reason, to be captive; the firm is a monopsonist in the short-run’ (p. 137) 9 general impression given by most textbooks is that employers have negligible market power over their workers or that this is, at best, a trivial side issue. This situation contrasts strongly with the situation in another part of economics, industrial organization, where the standard assumption is that all firms have some product market power, although some are thought to have more market power than others. As a result, the bulk of the Handbook of Industrial Organization is about imperfect competi- tion in product markets and virtually every chapter has some reference to monopoly or oligopoly. This contrast between labor economics and industrial organization is odd given that one might think frictions are more important in the labor market as it is more costly to change one’s job than one’s supermarket. 6 The premise of this book is that labor economics should adopt a similar attitude to that in industrial organiza- tion and start analysis from the position that all employers have some labor market power. This book discusses most if not all of the issues in labor economics from the starting point that the labor market is monopsonistic. Given the evidence cited above on the paucity of references to monopsony in textbooks, one might expect a radical reworking of labor economics. Such an expectation will, more often than not, lead to disappoint- ment. Often, we will be able to draw heavily on existing work and simply look at issues from a different angle. Many explanations of labor market phenomena implicitly assume that the labor market is monopsonistic without articulating that fact. Perhaps the best example of this is search theory, an approach used to analyze a wide range of issues. The early developments, following Stigler (1962), were one- sided, treating the distribution of wage offers in the market as exogen- ous.
eBook - PDF- Rhona C. Free(Author)
- 2010(Publication Date)
- SAGE Publications, Inc(Publisher)
12 IMPERFECTLY COMPETITIVE PRODUCT MARKETS ELIZABETH J. JENSEN Hamilton College A ny introductory course in microeconomics spends a considerable amount of time examining perfectly competitive markets. It is important to understand this model; it serves as a benchmark for examining other industry structures and the welfare consequences of mov-ing away from perfect competition. However, it is also important to look at imperfectly competitive output markets—markets in which products are not perfectly homo-geneous or in which there are only a few sellers. While the perfectly competitive model assumes a large number of buyers and sellers, each of which is a price taker, the monopoly model assumes the opposite: one seller with complete control over price. Structurally, most markets are neither perfectly competitive nor monopolistic; they fall somewhere in between these two extremes of the competi-tive spectrum. The in-between markets are classified as either monopolistic competition or oligopolies depending on the number of firms in the market and the height of bar-riers to entry and exit. We turn first to monopoly. Monopoly A monopoly is the only producer of a good for which there are no close substitutes. This puts the monopolist in a unique position: It can raise its price without losing consumers to competitors charging a lower price. Thus, the monopolist is the industry and faces the downward-sloping market demand curve for its product. The monopolist can choose any point along that demand curve; it can set a high price and sell a relatively small quantity of output, or it can lower price and sell more output. Very few—if any—industries in the real world are pure monopolies. Examples of industries that come close include public utilities such as the local distributor of electricity or natural gas, the cable company in most communities, and, in a small isolated town, the local grocery store or gas station.
eBook - ePubWage-Fixing (Routledge Revivals)
Stagflation - Volume 1
- J. E. Meade(Author)
- 2013(Publication Date)
- Routledge(Publisher)
CHAPTER IVImperfect Competition and the Case for Wage-Fixing Institutions
We have stated the case for an economic system which ensures (1) a steady rate of growth in the level of the total money demands for the economy's goods and services and (2) the setting of money wage rates at levels which, against this background of a steady expansion of demand for the products of labour, promotes the full employment of the available labour. We are considering these arrangements in a mixed economy in which free enterprise plays a leading role.The forces of competition play a basic role in a free-enterprise system, as one enterprise searches for profit by expanding into a market against other competing enterprises. Steps are accordingly properly taken to prevent restrictive practices and the formation of monopolistic cartels among producers. Some simple minded persons may suggest that the same principles be applied in the labour market by outlawing the formation of similar labour monopolistic cartels and restrictive practices in restraint of trade. In other words, why not preserve full employment, against the background of a steady rate of growth of the total money demand for the products of labour, by a process of trade union bashing? Why not let the competing employers faced with the growing demand for their products bid against each other for the services of the available supply of workers, and let any workers who are still unemployed offer their services at wage rates at which it becomes profitable for the competing employers to employ them?It is the purpose of this chapter to argue that any such solution is unacceptable because wage-fixing arrangements of one kind or another play an essential role in the imperfectly competitive world in which we live. There are, however, some very important and beneficial forces at work in a competitive system; and although these forces are impeded and maimed in the real world in which competition is imperfect, yet they are potentially very beneficial and should be utilised as far as is compatible with the imperfections of the competitive system. Accordingly it is our intention in this chapter to outline the effects of the forces of competition in the fairyland of a perfectly competitive world, to explain in what respects the beneficial effects of competition are inevitably impeded, and in what respects they may still be promoted, in the real world of imperfect competition, and to apply this analysis to the problem of determining the proper functions of labour monopolies or other wage-fixing institutions in a mixed economy with an extensive free-enterprise sector.
eBook - PDFAdvances in Understanding Strategic Behaviour
Game Theory, Experiments and Bounded Rationality
- S. Huck(Author)
- 2004(Publication Date)
- Palgrave Macmillan(Publisher)
The third section analyses the benchmark as equi- librium under perfect information, where job applicants can observe the amount of training in each type of firm. In the fourth section we describe competition under imperfect information: and as the fifth section shows, in this situation the competitive outcome may involve job rationing and a segmented labour market. The sixth section concludes. Helmut Bester 75 The model In a two-period economy, there are L workers and two types of firms, indexed = a b. The number of firms of type is N . Labour is the only input to produce homogeneous output, and each firm can employ one worker each period. The production technology of firm is described by Y = Y 1 Y 2 , where Y 1 and Y 2 is the output from employing a worker at dates 1 and 2, respectively. If no worker is hired, output is zero. Workers acquire specific skills in the first period through on-the-job training. Therefore, Y 2 is higher than Y 1 if at date 2 the same worker is employed as in the period before. But because training is specific, a new employee can produce only Y 1 at any date. There is a perfect credit market. Workers and producers can borrow and lend at the exogenously given interest rate 1 − / ; that is, they have the common discount factor . Let w = w 1 w 2 denote the wages paid by firm to its employee in Periods 1 and 2. Then its overall profit is given by: w = Y 1 − w 1 + Y 2 − w 2 (5.1) The worker’s lifetime income from the wage profile w is: U w = w 1 + w 2 (5.2) The worker’s reservation wage for employment in any of the two industries is per period. Therefore, the worker will accept wage offer w only if U w 1 + . The alternative income may either represent the worker’s utility from leisure or the wage paid by firms without on-the-job training.
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