THE LEVEL OF WAGE RATES IS NOT

SATISFACTORILY EXPLAINED BY ECONOMIC THEORY BECAUSE THAT THEORY CONCENTRATES ON PERFECT COMPETITION WHILE MOST LABOR MARKETS ARE IMPERFECT. DISCUSS WHETHER THIS CLAIM IS TRUE.

Define

Wage rate – pay rate based on per unit of production. Perfect competition - a theoretical market structure. It is primarily used as a benchmark against which other market structures are compared.

Marginal Revenue Product -Extra revenue obtained from extra output produced by additional factor/worker employed.

Theory of wages Workers will be hired up to the point where MRP equals to wage rate by a maximising firm because it is not efficient for a firm to pay worker more than revenue that will be gained from their labor.

WAGE DETERMINATION
Level of wage rate is determined by the demand and supply for labor.  Demand for labor represented by marginal revenue of product which is the additional revenue obtained from hiring an extra worker to produce an extra unit of output.  Supply of labor is determined by the size of labor force and those actively seeking for jobs. Represented by a curve that slopes upwards because more workers are willing to work as the wage rate increases.  (draw graph of supply and demand for wage rates against quantity of labors)

PERFECT MARKET
There will be a large number of suppliers and buyers. Suppliers being workers and buyers being the employers. No matter how much the amount of supply in existence, the price being the wage rate remains unaffected.  Assumption that buyers and suppliers have perfect information.  Wage rate and supply of labor is determined by the market demand and market supply of labor.(MRP=MFC)  Assumption that the employers will accept any wage rate since they are the price takers.

IMPERFECT MARKET
Realistically most labor markets are imperfect markets.  Either the firm is a monopoly buyer of labour i.e. a monopsonist or the firm is faced by a monopoly supplier i.e. trade union  There is always the lack of information and wage differentials in other parts of the market.  In same industry there will also be workers with different level of efficiency and experience.  Different type of jobs available.

WAGE DIFFERENTIAL

Differences in MRP

Differences in MPP The higher the productivity, the higher MRP, therefore the higher the wages for such labour eg doctor vs rubbich collectors. Differences in MR

A worker involved in industries where selling prices is higher will be able to add a higher marginal revenue each time he produces an extra unit of good.

Elasticity of demand

Inelastic demand The more inelastic the demand for labour, the more successful labour is in asking for pay rise. Such workers are normally paid higher wages. Eg. Inelastic supply The more inelastic the supply of labour, the higher the economic rent labour earns, therefore the higher the wages for such labour.

Type of market labour

Perfect competition Labours in this market are able to earn higher wages Imperfect competition Such labour are exploited by the monopsonist -earn lower wages than they supposed to.

The theory does explain imperfect markets. Though there’s no definite answer to the level of wages when trade unions exist or government intervenes, it gives the limit between which the wages will be fixed.

Bilateral Monopoly – Monopsony vs Trade Union

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