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In the real world, labour markets are not perfectly competitive. Their imperfections make them imperfectly competitive. But, what is an imperfectly competitive labour market? How are wages and employment levels determined in this kind of labour market? You will find the answers to these questions in what follows and you will also learn which factors influence an imperfect labour market.
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Sign up for freeWhere do monopsony employers set their workers’ wages?
Which labour market is more realistic?
Wages in an imperfectly competitive labour market are at the equilibrium wage.
Finish the sentence: Firms in an imperfectly competitive labour market are____________
Who has wage-setting powers when there is a monopsony employer in a labour market?
Where do monopsony employers set their workers’ wages?
Which labour market is more realistic?
Wages in an imperfectly competitive labour market are at the equilibrium wage.
Finish the sentence: Firms in an imperfectly competitive labour market are____________
Who has wage-setting powers when there is a monopsony employer in a labour market?
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Team Imperfectly Competitive Labour Market Teachers
An imperfectly competitive labour market is very different to a perfectly competitive labour market. In a perfectly competitive labour market, there are many firms offering similar or identical jobs. Workers in this labour market have similar skills. Firms are wage takers, meaning that they pay their workers based on the equilibrium wage.
The imperfect labour market is the opposite of a perfectly competitive labour market and reflects the real world more realistically.
An imperfectly competitive labour market is a labour market where either the firms or workers have the power to influence wages. In this market firms or workers are wage makers.
The main characteristics of an imperfect labour market are:
There are many examples of imperfection in labour markets. These imperfections are what cause either the workers or employers to determine wages in the labour market. Let’s consider three of these imperfections:
Monopsony power gives firms in the labour market wage-setting powers.
Monopsony power is the power of the employer who is the single seller in the labour market.
Due to the firm’s monopsony power, it can set the wages and limit the number of workers. Since employees have no alternatives, they must accept the wage the employer offers.
We will look at this particular imperfection in more detail later on.
Trade unions help the members of the union to negotiate with their employers and get benefits and better working conditions. Unions give workers in the labour market wage-setting powers.
Trade unions are groups of people (employees/workers) who come together to protect their best interest.
Unions usually bargain for wages by going on strike or campaigning. Trade unions are particularly beneficial when they operate in an industry with a monopolistic employer or where the demand for labour is inelastic.
No market is perfect, and this is true for the labour market as well. There may be insufficient information or inaccurate information between employers and employees and this can result in friction and market failure in the labour market.
This can either result in firms or workers having the power to determine wages and employment.
As we mentioned previously, when there is a monopsony employer in a labour market, the firm has wage-setting powers. In this situation, the labour force is exploited by employers and the relative wage level of an employee is often much lower than the firm’s marginal revenue product (MRP).
In the figure below, we will see how wages are determined in the monopsony labour market and how the monopsony power impacts the wage rate.
In a perfectly competitive labour market, wages are determined by the equilibrium rate set by the whole industry. Each firm in the industry, then, adopts this wage.
In an imperfectly competitive labour market where one monopsony exists, they set their own wage. You can see this in Figure 3 below.
Figure 3. Wage Determination Imperfectly Competitive Labour Market, Vaia Original
In Figure 3, the workers in this labour market should be paid We, where MC = MRP. However, the monopsony exploits them and chooses to pay them Wm. The wage Wm is far below the wage they are worth, thus the green shaded area is the area of exploitation.
Trade unions are beneficial in markets like this one as they can pressure firms to pay their employers a higher wage, W1. Although this is still below what workers are actually worth, it is 'fair' compensation.
Figure 3 above shows us another aspect monopsonies can control in the labour market: employment levels.
Not only can the employer pay their workers a lower wage, but they can also restrict the level of employment. Since they are the only employer in the industry, their monopsony power allows them to employ fewer people at a lower wage.
Thus, the demand for labour in an imperfect market is well below the equilibrium level.
We have considered how an imperfectly competitive labour market causes wage differences. Other factors that can cause a difference in wages across the labour market are:
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What is an imperfectly competitive labour market?
An imperfectly competitive labour market is a market where either the firms or workers have the power to influence wages. In this market firms or workers are wage makers.
What are some imperfections in a labour market?
Some imperfections in a labour market are:
What are some characteristics of an imperfectly competitive labour market?
Some characteristics of an imperfectly competitive labour market are:
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