Wage Rates in Perfectively Competitive Labour Markets
- In a perfectly competitive labour market, relative wage rates are determined at the point where DL = SL
- There is an assumption in perfect competition that all workers possess identical skills and receive the same wage rate
- In reality, workers have diverse skill sets and different motivational factors drive them
- In reality, workers have diverse skill sets and different motivational factors drive them
- An excess demand of labour leads to a shortage of workers in a particular occupation, causing wages tend to increase
- This causes a rise in wages and is an incentive to workers to enter the labour market for that occupation
- This increases the supply of labor (SL)
- This causes a rise in wages and is an incentive to workers to enter the labour market for that occupation
- An excess supply of labour leads to a surplus of workers in a particular industry, which causes wages to decrease
- This fall in wages cause some workers exit the labour market for that occupation
- The equilibrium for labour adjusts where
- There is no excess supply of labour
- There is no excess demand for labour
Exam Tip
In the same way that perfectively competitive markets do not actually exist in reality (though some industries get close!), labour markets are never perfectively competitive. One of the reasons for this is the existence of asymmetric information. Workers and employers do not always know if there is a shortage or excess of labour, or they may not fully realise what the precise wage rate should be.
Labour markets are inherently imperfect.