Economics
Perfectly Competitive Labour Market
In a perfectly competitive labor market, many firms compete to hire workers with identical skills, and workers have perfect information about job opportunities and wages. The market is characterized by a large number of buyers and sellers, homogenous products, and free entry and exit. Wages are determined by the intersection of the supply and demand for labor, with no individual or firm having the power to influence the market wage.
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10 Key excerpts on "Perfectly Competitive Labour Market"
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 - PDF- Howard M. Wachtel(Author)
- 2013(Publication Date)
- Academic Press(Publisher)
The firm still operates as a perfect competitor in the labor market in which it acquires labor. This is reflected by the familiar perfectly elastic, horizontal labor supply curve at the prevailing market-determined wage rate (W). The firm can hire as many workers as it wishes at that wage. Given a market-determined wage rate of W, the firm sets its optimal level of employment at E, the point at which the wage rate (marginal cost) just equals the marginal revenue product of labor. At this point the firm operating in an imperfectly competitive product market will maximize its profits and minimize its costs by choosing a level of employment at which marginal revenue equals marginal cost. If the firm were to employ E p units of labor, as it would have done when it operated in a perfectly competitive product market, it would now earn less profit. 9 The wage rate, or the marginal cost per unit of employment, 9In a perfectly competitive situation, MRP L = VMP L and the firm sets its level of employment at E p , where W = VMP L = MRP L • 90 CHAPTER 5 / WAGES AND MARKET STRUCTURE would exceed the marginal revenue from all the units of labor hired above E. Similarly, if the firm employed fewer than E units of labor, it would not be maximizing profits, since all units of labor employed below E would be yielding amounts of marginal revenue greater than their costs to the firm at the margin. Under conditions of imperfect competition, therefore, employment and output in the firm are less, but profits are greater. The firm can set its price for the output it brings to the market and is a large enough supplier of products to the market that it can see the consequences of its pricing decisions. It now faces a downward-sloping product demand curve, which is more inelastic over the entire range than in perfect competition, where the firm faced a perfectly elastic, horizontal product demand curve over its entire range of operations.
- 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 - 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.
eBook - ePub- Paul Downward, Alistair Dawson, Trudo Dejonghe(Authors)
- 2009(Publication Date)
- Routledge(Publisher)
At a rudimentary level, there will always be more players than clubs. It is clear that these assumptions are closer to sporting leagues than the perfectly competitive assumptions. The limiting theoretical case of this scenario is a monopsony, which has been used to describe the historical position of sports labour markets in their historic context as described above. This labour market leads to the monopsonistic exploitation of players. 7 This exploitation arises because players will receive salaries below their MRP, as is now illustrated. FIGURE 11.1 Labour market structures 11.4.1 Monopsony The monopsony model differs from the perfectly competitive model inasmuch as the MC of hiring another employee comprises the wage received by that person plus the extra wages paid to those who were already on the payroll. This drives a wedge between the MRPL and the wage. The intuition is that the higher wages needed to attract additional workers are also paid to other employees. Appendix 11.2 presents the result more formally. Figure 11.2 illustrates the comparison between monopsony and competition, and illustrates the associated equilibrium levels of the wage rate and employment, defined as hours of labour purchased per week. A 1 A 2 is the perfectly competitive firm’s demand for labour, MRPL, defined over hours of work, while A 1 A 3 is the corresponding MRPL of the monopsonist. B 1 B 2 is the weekly supply of hours to price-taking firms in the labour market. B 1 B 3 is the monopsonist’s marginal cost of labour (MCL). The perfect competitor maximizes profit where B 1 B 2 intersects A 1 A 2, giving W 0, E 0 as the perfectly competitive equilibrium wage–hours combination. The monopsony firm maximizes its profit where B 1 B 3 (MCL) intersects A 1 A 3, but the monopsony equilibrium wage–hours combination is W 2, E 2. Note that under monopsony the MRPL (given by A 1 A 3) exceeds W 2, signifying exploitation of labour
eBook - PDFThe Economics of Imperfect Labor Markets
Second Edition
- Tito Boeri, Jan Ours(Authors)
- 2013(Publication Date)
- Princeton University Press(Publisher)
4. Formally, for a competitive firm (superscript c ), the value of the marginal product of labor VMP is VMP c = pf L , where p is the (given) price at which output can be sold, and f L is the marginal product of labor. For a firm operating in a noncompetitive product market, we have instead VMP = pf L + p L fy , where p L is the marginal effect on prices of the increase in the quantity produced by the firm as-sociated with the use of an additional unit of labor, from which it follows that VMP = VMP c when p L = 0; that is, the firm is also a price-taker in product markets. Because p L is negative, labor demand of a monopolist will always be to the left of the demand curve of a competitive firm. Notice further that the difference between y c and y is increasing in f , hence in the amount of labor being used. Thus, the labor demand of a monopolist will be steeper than that of a competitive firm. 1.2. The Reservation Wage and the Value of a Job 13 increasing production lowers prices of all units being sold. The less competitive the product market is, the stronger will be the decline in prices associated with an increase in the quantity of jobs and output. By the same token, more competition in product markets involves a flatter labor demand curve. To summarize, independently of the product market structure, labor demand L d will be declining with wages, or the inverse labor demand, y(L) , will be declin-ing with L . When product markets are noncompetitive, labor demand will be less responsive to wage changes (steeper labor demand). 1.2.3 A Perfect Labor Market Equilibrium Figure 1.5 depicts a downward-sloping labor demand together with an upward-sloping aggregate labor supply. In a perfect labor market the equilibrium wage level w ∗ will lie at the intersection of the two curves. It is important to notice that there is only one wage level being determined at the equilibrium in this context.
eBook - PDF- D. Greenaway, R. Upward, P. Wright, D. Greenaway, R. Upward, P. Wright(Authors)
- 2008(Publication Date)
- Palgrave Macmillan(Publisher)
If firms are symmetrical, each will operate on the same scale x i = x, and index of fragmentation z i = z, and each firm will charge the same price p i = p. Hence, we obtain supply and demand for final goods as a function of the relative price of business services (supply) and income (demand). Both of these variables are in turn determined by labour market con- ditions. If mobility between sectors in each country is costless, labour will be allocated according to the value marginal product in each sector. With labour markets segmented by skill level, equilibrium in the high- skill labour market thus requires wages to equal value marginal products in the production of differentiated goods and in business services, whereas the low-skill labour market is in equilibrium if wages equal value marginal products in direct production and in the production of the numeraire. With labour markets for both types clearing, sectoral employ- ment of high- (low-) skilled labour adds up to high- (low-) skilled labour supply H P + H S = H (L P + L S = L). Thus, sectoral output and employ- ment, national income, and the firm level extent of fragmentation are a function of endowments, especially factor proportions. 138 Globalisation and Labour Market Adjustment If the world consists of two identical countries except for differences in endowments (with variables of Foreign distinguished from those of Home by an asterisk), and if both countries are integrated by trade, the relevant endowment is the world supply of high- and low-skilled labour, H + H ∗ = H ie and L + L ∗ = κ H + κ ∗ H ∗ = L ie respectively. Factor proportions in the (integrated) world economy are given by κ ie ≡ ( L + L ∗ )/ ( H + H ∗ ). In order to illustrate results in two dimensions, we will assume that both countries hold equal amounts of high-skilled labour so that relative factor supply in the world economy is κ ie = (1 + ω) κ/2 with ω ≡ κ ∗ /κ a measure of the factor proportions differential.
eBook - PDF- M. Hopkins(Author)
- 2002(Publication Date)
- Palgrave Macmillan(Publisher)
For example, at different times Keynes could have been considered a classical, neo-classical, Marxist or Major Theories of Labour Market Mismatch 27 even monetarist scholar because there are strands of each school in his writings. 2.2 Classical economists These economists, working in the mid-nineteenth century, were greatly concerned with the interactions between labour, capital and land. Adam Smith in The Wealth of Nations, first published in 1776, was con- cerned with the principles of free competition and the ‘invisible hand’ of the open market. Few economists would disagree with Smith that markets work when one important condition holds, namely, actors in the market have equal weight in terms of size of firm, information, human and physical capital. Imperfections or imbalances in these initial conditions in the real world have led to the enormous and burgeoning economic literature of today, and the attempts to resolve these overriding qualifications have led to the growth of economics as a science. For Smith, 5 the growth of the labour force was related, on the supply side, to population. In the long run, he believed that population growth was regulated by the funds available for human sustenance. Conse- quently, the wage rate plays a crucial role in determining population size. The limiting wage was that which was neither sufficiently high to permit an increase in numbers nor sufficiently low to force a shrinkage of the population base. Smith called this rate ‘the subsistence wage’, one which is consistent with a constant population. Smith argued that in a purely competitive market, if the wage rate fell temporarily below what was necessary to maintain labour demand and supply in balance, the pressure of demand would act to raise it. Conversely, should wages be above the equilibrium level, then the excess supply resulting from too rapid a growth of population would soon lower the remuneration of labour.
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