5.3 Interaction of Labour Markets

• Wage differentials


  Differences in wages even for the same job
• Reasons for wage differentials

  • Formal education
  • Skills, qualifications and training
  • Pay gaps
  • Wages and skills
  • Gender
  • Discrimination
• Monopsony power


  When there is only one buyer of labour in the market, the firm has the ability to set wages
• Monopsony employer


  1. Marginal cost of adding an extra worker is more than the average cost

  2. Firm profit maximises at MC = MRP

  3. Employs Q2 workers

  4. Pays wage W2, lower than the market equilibrium competitive wage
• Monopsony employer


  Employment rate and wage rate are below those that would exist in a perfectly competitive labour market
• Trade union power


  Trade unions can push for higher wages above the market equilibrium, making the labour market more flexible
• Trade union actions


  1. Limit the supply of labour

  2. Close firms

  3. Threaten strike action
• Trade union actions


  Can counter-balance exploitative monopsony power, but limits on workers might cause some to withdraw from the labour market
• Trade unions aim to protect workers, secure jobs, improve working conditions and try and achieve higher wages
• Trade unions try to increase wage rates too much


  Firms might no longer be able to afford to employ workers, causing them to close down or reduce employment
• Bilateral monopoly


  One buyer (monopsony) and one supplier (trade union) in the same market
• Monopsony buyer


  Pays wage W2 and employs quantity Q2 where MRP = MC
• Trade union actions


  Try to negotiate a higher wage of W3 without causing the quantity of labour employed to fall
• Labour market equilibrium


  Determined where the supply of labour and the demand for labour meet, determining the wage rate
• Demand for labour falls

  Wage rate would fall from W to W1 in a free market
• Supply of labour increases


  Wage rate would fall from W to W1 in a free market
• Wages are not this flexible in the real labour market, due to 'sticky wages'
• Geographical immobility of labour

  Obstacles preventing labour from moving between areas
• Occupational immobility of labour


  Obstacles preventing labour from changing their occupation
• Labour market flexibility


  How willing and able labour is to respond to changes in the conditions of the market
• Factors affecting labour market flexibility


  • Trade union power
  • Regulation
  • Welfare payments and income tax rates
  • Training
  • Infrastructure
  • Housing