wage determination in an imperfect market

• Wage determination in imperfect markets

  Imperfections in the labour market
• Role of government and trade unions

  In wage determination
• The forces of supply and demand may not operate freely in the labour market
• Demand and supply for labour can be influenced by government intervention and unions
• Trade unions


  • Organisations that represent the workers' interest at work
  • Collectively workers have power - individually they may not achieve much
• Functions of trade unions

  • Increase the wages of the employees
  • Improve working conditions
  • Lobby for higher pay for more skilled workers
  • Fight job losses
  • Provide a safe working environment
  • Secure additional work benefits
  • Prevent and assist with unfair dismissals
• How unions affect wage rate and equilibrium

  1. Union fights for higher wages (Wu)

  2. Higher wage rates are better for workers

  3. Long term: leads to potential unemployment as supply exceeds demand at Wu
• How governments affect the labour market


  • Setting of minimum wages above market rate
  • Effect on wage rate - inelastic demand for labour: minimum wage will not result in huge job losses
  • Effect on wage rate - elastic demand for labour: firms can choose not to hire workers at the higher rate, resulting in greater job losses
  • Minimum wages lead to excess supply of labour