Principles of Microeconomics
🛒principles of microeconomics review
14.2 Wages and Employment in an Imperfectly Competitive Labor Market
Last Updated on June 25, 2024
Imperfectly competitive labor markets can seriously impact workers. When employers have too much power, they can pay lower wages and hire fewer people than in a fair market. This creates problems for workers and the economy.
Understanding these markets helps us see why some jobs pay less than they should. It also shows how having more job options and employers can lead to better wages and more opportunities for workers.
Imperfectly Competitive Labor Markets
Labor Market Power
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- Employers with monopsony power face upward-sloping labor supply curve
- Must increase wages to attract additional workers (higher labor costs)
- Marginal cost of labor exceeds wage rate (MCL > w)
- Profit-maximizing employment where marginal revenue product equals marginal cost of labor
- Wage determined by labor supply curve at profit-maximizing employment
- Wage lower than MRP and competitive wage (exploitation)
Monopsony Impact
- Monopsony leads to lower wages vs. competitive market
- Employer pays wage below MRP (labor exploitation)
- Monopsony results in lower employment vs. competitive market
- Employer hires fewer workers to suppress wages (underemployment)
- Monopsony creates deadweight loss
- Workers willing to work at competitive wage not hired (inefficiency)
- Marginal benefit of labor exceeds marginal cost (allocative inefficiency)
Competitive vs. Monopsony
- Competitive markets
- Many employers and workers, no individual employer influences wage
- Employers are wage-takers, perfectly elastic labor supply (horizontal)
- Wage equals MRP of labor (efficiency)
- Monopsony markets
- One or few employers dominate, significant market power
- Employers face upward-sloping labor supply (rising labor costs)
- Employers set wages below MRP of labor (exploitation)
- Wage and employment differences
- Competitive: Higher wages and employment (efficiency)
- Monopsony: Lower wages and employment (exploitation, inefficiency)
Key Terms to Review (24)
Productivity: Productivity is a measure of the efficiency with which resources, such as labor, capital, and technology, are used to produce goods and services. It is a crucial concept in economics that underlies the ability of individuals, businesses, and nations to generate economic growth and improve living standards.
Minimum Wage: Minimum wage refers to the lowest hourly rate that employers are legally required to pay their workers. It is a government-mandated price floor in the labor market, intended to protect low-wage workers and ensure a minimum standard of living.
Labor Force Participation Rate: The labor force participation rate is the percentage of the working-age population that is either employed or actively looking for work. It is a key measure of the size and engagement of the labor force within an economy.
Deadweight Loss: Deadweight loss refers to the economic inefficiency that occurs when the socially optimal quantity of a good or service is not produced or consumed due to market failures, such as government intervention or the presence of monopolies. It represents the loss in total surplus (the sum of consumer and producer surplus) that results from a deviation from the optimal market equilibrium.
Market Concentration: Market concentration refers to the degree to which a small number of firms or companies dominate a particular industry or market. It measures the level of competition within a market and can have significant implications for consumer welfare, firm behavior, and regulatory policies.
Oligopsony: Oligopsony is a market structure where there are few buyers (or demanders) of a product or service, resulting in those buyers having significant market power over the sellers (or suppliers). This market structure is the buyer-side counterpart to the seller-side oligopoly.
Labor Supply Curve: The labor supply curve represents the relationship between the wage rate and the quantity of labor supplied by workers. It shows how the amount of labor that workers are willing to provide changes as the wage rate changes.
Monopsonistic Competition: Monopsonistic competition is a market structure in which there is a single buyer (a monopsony) that faces competition from other buyers for the same product or service. In this scenario, the monopsony has significant market power and can influence the price and quantity of the good or labor it purchases.
Labor Market Frictions: Labor market frictions refer to the various obstacles and impediments that prevent the efficient matching of workers and job opportunities in the labor market. These frictions can lead to persistent unemployment and wage disparities, as the labor market fails to clear and achieve an optimal equilibrium between supply and demand.
Discrimination: Discrimination refers to the act of treating individuals or groups differently, often unfairly, based on their race, gender, age, religion, or other characteristics. In the context of an imperfectly competitive labor market, discrimination can lead to disparities in wages and employment opportunities.
Gary Becker: Gary Becker was an American economist who made significant contributions to the field of labor economics. He is known for his pioneering work on the economic analysis of human behavior, including topics such as the family, education, and discrimination.
Marginal Cost of Labor Curve: The marginal cost of labor curve represents the additional cost incurred by a firm for hiring one more unit of labor. It is a key concept in understanding wages and employment in an imperfectly competitive labor market.
Wage Elasticity of Labor Supply: Wage elasticity of labor supply refers to the responsiveness of the quantity of labor supplied to changes in the wage rate. It measures the percentage change in the quantity of labor supplied in response to a percentage change in the wage rate, holding all other factors constant.
Ronald Coase: Ronald Coase was a renowned economist who made significant contributions to the understanding of how institutions and the legal system impact economic outcomes. His work, particularly the Coase Theorem, is highly relevant in the context of wages and employment in an imperfectly competitive labor market.
Search Costs: Search costs refer to the time, effort, and resources expended by individuals or firms in the process of gathering information and finding the best available options in a market. These costs are a critical factor in understanding imperfect information and the functioning of labor and other markets.
Efficiency Wage Theory: Efficiency wage theory is an economic concept that explains how employers may find it profitable to pay workers higher-than-market-clearing wages in order to increase worker productivity and reduce employee turnover. This theory suggests that wages can affect the quality and effort of the workforce, and that firms may strategically set wages above the market-clearing level to achieve greater efficiency.
Bilateral Monopoly: A bilateral monopoly is a market structure in which there is a single buyer (monopsony) and a single seller (monopoly) of a particular good or service. In this scenario, the buyer and the seller must negotiate the terms of the transaction, including the price and quantity, as they both have significant market power.
Insider-Outsider Model: The insider-outsider model is a concept in labor economics that explains how the presence of insiders, or incumbent workers, can influence wages and employment in an imperfectly competitive labor market. The model highlights the bargaining power and job protection that insiders possess, which can lead to wage outcomes that deviate from the competitive market equilibrium.
Labor Market Power: Labor market power refers to the ability of employers or workers to influence the terms of employment, such as wages, hours, and working conditions, in a given labor market. This concept is particularly relevant in the context of imperfectly competitive labor markets, where the dynamics between supply and demand for labor differ from the perfectly competitive model.
Collective Bargaining: Collective bargaining is the process by which workers, through their labor unions, negotiate with employers to determine the conditions of employment. It involves the negotiation of wages, hours, benefits, and other working conditions for a group of employees.
Wage-Setting Power: Wage-setting power refers to the ability of employers or workers to influence the wages paid in a labor market. It is a key concept in the analysis of imperfectly competitive labor markets, where market forces do not solely determine wages.
Marginal Revenue Product: Marginal revenue product (MRP) is the additional revenue a firm can generate by employing one more unit of a variable input, such as labor. It represents the value of the extra output produced by that additional unit of input. MRP is a crucial concept in understanding how firms make decisions about hiring and employment in imperfectly competitive labor markets, bilateral monopolies, and the factors contributing to income inequality.
Labor Unions: Labor unions are organizations of workers who have come together to collectively bargain with employers over wages, benefits, and working conditions. They represent the collective interests of their members and seek to improve their economic and social status through collective action.
Monopsony: Monopsony is a market structure where there is only one buyer for a product or service, giving that buyer significant control over the price and supply of the goods or services being purchased. In labor markets, this means that a single employer can dictate terms for wages and employment, often leading to lower wages than would occur in a competitive market.