Chapter 7: Wages & Employment in a Single Labour Market
Perfect Competition
● Perfect Competition: Large number of producers & consumers competing with
one another in this kind of environment
Minimum Wage
● Higher Wages
- Those workers who remain employed following the introduction of this
minimum wage would benefit from an increased wage
- Those workers who became unemployed following the introduction of
this minimum wage would suffer
Competitive Firm’s Interaction with the Market
● Competitive in both the product & the labour markets
Assumptions
● Homogeneous Workers: Workers are identical to one another
● Firms are price takers & wage takers
● Firms can employ all the labour they need at the market wage rate
- Supply of labour is perfectly elastic (horizontal) at the wage rate
● When the firm is a competitive buyer of labour, it faces a perfectly elastic
supply of labour at the market wage
Short Run vs Long Run
● In the short run, firms may respond to increased demand for their product by
increasing their demand for additional workers
● Given the upward-sloping labour supply curve, the wage rate and level of
employment will increase in the short run
● These short-run wage increases can serve as a market signal, attracting more
workers to a particular job market in the long run (labour supply curve shifts to
the right)
● Labour Mobility: How easy it is for a worker to move to another job (contract,
location)
● Short Run - Limited labour mobility
● Long Run - Complete labour mobility
Equilibrium in a Competitive Market
● Characteristics of the long-run equilibrium & the market-clearing model
(neoclassical)
- For markets with homogeneous workers and homogeneous jobs, wages
will be equalized across workers
- In the short run, firms may have to raise wage to attract additional
workers
, Imperfect Competition in the Product Market
Monopoly
● One firm is the sole seller of some product
● More likely of a labour union to emerge in larger workforces like a monopoly
● More conscious about their image & well-known to the public
● In practice, a firm that is overwhelmingly dominant in its industry might be
considered a monopolist
● When the monopolist hires more labour to produce more output, not only
does the marginal physical product of labour fall (as is the case with the
competitor), but also the marginal revenue from an additional unit of output,
MRQ, falls
● Lack of competition allows it charge above-normal prices & earn above-normal
profits + wages
● Monopolist, unlike the competitive firm, can sell more output only by lowering
the product price and this, in turn, lowers marginal revenue
Oligopoly
● A few, large firms compete with one another
● These firms sell similar (perhaps identical) products
● A monopolist or oligopolist earns above-normal profits
● In some cases, labour may be able to absorb some of these profits via above-
market wages
- Unionization of workers
- Unions are more common in larger firms
● Monopolist/oligopolist may be less cost-conscious (due to “easy” profits) &
may yield to wage demands
● Monopolist/oligopolist may be sensitive to public image & pay higher wages to
buy a good image
● Workers employed by oligopolistic firms will also likely be able to negotiate a
wage above the going market wage
● Large firms pay higher wages, all else being equal
Monopsony
● A monopsony is a large firm relative to the size of the labour market
● Only buyer of a labour
● A monopsony can choose the wage it offers (can lower wages without losing
its entire workforce)
● Not a wage taker, like firms facing perfect competition
● When a monopsony decreases the wages it offers:
- It does not lose its entire work force (as would be the case for a firm
facing perfect competition)
- Most workforce will accept wage decrease & continue working
Perfect Competition
● Perfect Competition: Large number of producers & consumers competing with
one another in this kind of environment
Minimum Wage
● Higher Wages
- Those workers who remain employed following the introduction of this
minimum wage would benefit from an increased wage
- Those workers who became unemployed following the introduction of
this minimum wage would suffer
Competitive Firm’s Interaction with the Market
● Competitive in both the product & the labour markets
Assumptions
● Homogeneous Workers: Workers are identical to one another
● Firms are price takers & wage takers
● Firms can employ all the labour they need at the market wage rate
- Supply of labour is perfectly elastic (horizontal) at the wage rate
● When the firm is a competitive buyer of labour, it faces a perfectly elastic
supply of labour at the market wage
Short Run vs Long Run
● In the short run, firms may respond to increased demand for their product by
increasing their demand for additional workers
● Given the upward-sloping labour supply curve, the wage rate and level of
employment will increase in the short run
● These short-run wage increases can serve as a market signal, attracting more
workers to a particular job market in the long run (labour supply curve shifts to
the right)
● Labour Mobility: How easy it is for a worker to move to another job (contract,
location)
● Short Run - Limited labour mobility
● Long Run - Complete labour mobility
Equilibrium in a Competitive Market
● Characteristics of the long-run equilibrium & the market-clearing model
(neoclassical)
- For markets with homogeneous workers and homogeneous jobs, wages
will be equalized across workers
- In the short run, firms may have to raise wage to attract additional
workers
, Imperfect Competition in the Product Market
Monopoly
● One firm is the sole seller of some product
● More likely of a labour union to emerge in larger workforces like a monopoly
● More conscious about their image & well-known to the public
● In practice, a firm that is overwhelmingly dominant in its industry might be
considered a monopolist
● When the monopolist hires more labour to produce more output, not only
does the marginal physical product of labour fall (as is the case with the
competitor), but also the marginal revenue from an additional unit of output,
MRQ, falls
● Lack of competition allows it charge above-normal prices & earn above-normal
profits + wages
● Monopolist, unlike the competitive firm, can sell more output only by lowering
the product price and this, in turn, lowers marginal revenue
Oligopoly
● A few, large firms compete with one another
● These firms sell similar (perhaps identical) products
● A monopolist or oligopolist earns above-normal profits
● In some cases, labour may be able to absorb some of these profits via above-
market wages
- Unionization of workers
- Unions are more common in larger firms
● Monopolist/oligopolist may be less cost-conscious (due to “easy” profits) &
may yield to wage demands
● Monopolist/oligopolist may be sensitive to public image & pay higher wages to
buy a good image
● Workers employed by oligopolistic firms will also likely be able to negotiate a
wage above the going market wage
● Large firms pay higher wages, all else being equal
Monopsony
● A monopsony is a large firm relative to the size of the labour market
● Only buyer of a labour
● A monopsony can choose the wage it offers (can lower wages without losing
its entire workforce)
● Not a wage taker, like firms facing perfect competition
● When a monopsony decreases the wages it offers:
- It does not lose its entire work force (as would be the case for a firm
facing perfect competition)
- Most workforce will accept wage decrease & continue working
