Wage Determination in Competitive and Non-Competitive Markets

This section explains Wage Determination in Competitive and Non-Competitive Markets including, Understanding of Current Labour Market Issues, Government Intervention in the Labour Market and The Significance of the Elasticity of Demand and Supply of Labour.

Wages are determined by the interaction of supply and demand for labour. In a competitive labour market, equilibrium is reached where supply equals demand. However, in reality, markets are often imperfect, and government intervention or institutional factors also influence wage levels and employment.

Diagrammatic Analysis of Labour Market Equilibrium

• In a perfectly competitive labour market, the equilibrium wage is determined by the intersection of the labour demand curve (derived from the marginal revenue product of labour) and the labour supply curve.
• The equilibrium determines the market wage rate and employment level.
• Shifts in demand or supply will change the equilibrium:
  • Demand may shift due to changes in productivity, product demand, or capital prices.
  • Supply may shift due to changes in working conditions, migration, or training.
• Wage determination in monopsony (a non-competitive labour market) shows a single employer setting wages below the competitive level, reducing employment and causing welfare loss.

Understanding of Current Labour Market Issues

Examples of real-world labour market challenges include:

• Skills shortages in certain sectors (e.g. construction, healthcare, tech).
• Wage inequality across regions and occupations.
• Impact of automation and AI on employment patterns.
• Zero-hour contracts, the gig economy, and precarious work.
• The role of trade unions and changes in bargaining power.
• Effects of inflation and living costs on real wages.

Government Intervention in the Labour Market

Governments intervene to correct market failures, promote equity, and support economic efficiency.

Maximum and Minimum Wages:

• Minimum wage laws set a legal wage floor, aiming to reduce poverty and exploitation.
• If set above equilibrium, they may cause excess supply (unemployment).
• Maximum wages are rarely used but could be applied to limit public sector pay or in wartime economies.

Public Sector Wage Setting:

• Governments may set wages for nurses, teachers, or civil servants.
• Often influenced by budget constraints, political priorities, and the need to attract and retain staff.

Policies to Tackle Labour Market Immobility:

• Training and education programmes to reduce occupational immobility.
• Subsidies for relocation or housing to address geographical immobility.
• Improved infrastructure and transport links.
• Job matching services (e.g. Jobcentre Plus in the UK).

The Significance of the Elasticity of Demand and Supply of Labour

Understanding elasticity helps predict the impact of wage changes on employment.

Elasticity of Demand for Labour:

• Measures responsiveness of labour demanded to wage changes.
• More elastic when:
  • Labour is easily substitutable by capital
  • Labour costs are a high proportion of total costs
  • Demand for the final product is elastic
• Inelastic demand means wage increases have smaller effects on employment.

Elasticity of Supply of Labour:

• Measures responsiveness of labour supplied to wage changes.
• More elastic when:
  • Labour requires little training
  • Workers can easily switch between jobs
  • There is high geographical mobility
• Inelastic supply may cause skills shortages and wage inflation in key sectors.

Summary

Wage determination in the labour market is shaped by market forces, government policy, and labour market conditions. Diagrams, real-world application, and an understanding of elasticity are essential for effective analysis and evaluation of wage outcomes in both competitive and non-competitive settings.