Interaction of labour markets

• Perfectly competitive labor market


  All labor markets have no differences in wages between professions due to two key assumptions: 1) All workers are homogeneous, 2) There is perfect mobility of labor
• Wage differential in perfectly competitive labor market

  1. Wages for lawyers increase and are higher than wages for train drivers

  2. Train drivers leave their job and become lawyers due to perfect mobility

  3. Supply of train drivers decreases, pushing up their wage

  4. Supply of lawyers increases, pushing down their wage

  5. Wages are then equalized between the two professions
• Wage differentials exist in the real world, so labor markets must not be perfectly competitive
• Purpose of studying perfectly competitive labor markets

  It gives a benchmark to compare real-world labor markets to, in order to understand why wage differentials occur
• Market imperfections that can cause wage differentials in real-world labor markets


  • Labor is not homogeneous
  • Workers are not suitable for all jobs
  • Discrimination
  • Non-monetary considerations affect job decisions
  • Occupational immobility
  • Geographical immobility
  • Imperfect knowledge of market conditions
  • Trade unions
  • Monopsonies
• Compensating wage differential


  Professions with unpleasant working conditions tend to have higher wages to compensate, while professions with pleasant working conditions tend to have lower wages
• The assumptions of perfectly competitive labor markets do not hold in the real world due to various market imperfections, which can explain the existence of wage differentials
• Monopsony


  The sole employer of labor in a given industry
• In the UK, teachers and nurses are employed by a monopsony employer - the state</b>
• Monopsony power


  The significant buying power over workers that a monopsony employer has
• Wage takers vs wage makers

  Monopsonies can set wages absolutely, they are not wage takers
• How monopsonies operate


  Hire workers up to where MRP equals marginal cost of labor
• Supply of labor for a monopsonist

  Equal to the average cost of labor
• As monopsonist hires more workers


  They have to increase wages for all workers, not just the additional worker
• Marginal cost of labor for monopsonist

  Greater than average cost of labor
• Monopsonist employment level


  Where MRP equals marginal cost of labor
• Monopsonist wage level


  Read off the supply curve (equal to average cost of labor) at the employment level
• Workers in a monopsony are paid less than their MRP
• The lower wages are compared to MRP, the greater the monopsony power
• Trade union


  An organization of workers that bargains collectively for higher wages and better working conditions
• Trade union


  • Bargains collectively for workers
  • Adopts collective bargaining
• Collective bargaining


  Workers bargaining together through their trade union, rather than individually
• In this video, we assume the trade union is a closed shop - it has all the workers in a given profession as members, and no other trade unions exist</b>
• Monopoly supplier of labour

  The trade union controls the labour supply at given wage rates
• Effect of trade union on labour market

  1. Trade union demands higher wage (wtu)

  2. Limits number of workers willing to work at that wage (horizontal supply curve up to that point)

  3. Beyond that point, supply curve reverts to original upward sloping curve
• Trade union demands higher wage

  Wages are now higher compared to competitive market outcome
• Trade union demands higher wage


  Employment is reduced compared to competitive market outcome
• Trade union action causes unemployment - excess supply of workers at the higher wage
• Trade unions may improve outcomes in a monopsony labour market by increasing wages and employment closer to competitive levels
• Factors affecting trade union power

  • Union density - proportion of workforce in union
  • Union markup - difference in wages between union and non-union workers
• Legislation since 1970s has reduced trade union power, e.g. banning closed shops, restricting strikes
• Shift of economy from manufacturing to services has made it harder to organise trade unions
• Increase in part-time work has also limited trade union power
• Globalisation and increased competitive pressures have reduced firms' ability to accept trade union demands
• Monopsony-controlled labor market


  A labor market where there is a single buyer of labor (the monopsonist)
• Diagram of monopsony labor market

  • Quantity of work is less than competitive quantities
  • Wages on offer are less than competitive wages
• Trade unions


  Bargain for higher wages and control the supply of labor at given wage rates
• How trade unions impact monopsony labor market

  1. Trade union bargains for higher wage (wtu)

  2. Monopsonist becomes a wage taker up to limit of workers willing to work at wtu

  3. Supply curve, average cost of labor curve, and marginal cost of labor curve become horizontal up to limit

  4. Beyond limit, supply curve reverts to original and marginal cost of labor curve has discontinuity
• Trade union involvement in monopsony labor market

  • Wages increase
  • Employment increases
• The greater the difference between wage offered by monopsonist and marginal revenue product of labor, the greater the benefit and efficiency gains from trade union involvement