Explain three reasons why labour markets may be imperfectly competitive

Authors Avatar by alexdarcy3gmailcom (student)

 ‘Although the wage differential has increased between top executives and other employees, the government cannot tell people what they should be paid. However, it should act where there has been market failure, because labour markets are not perfect.’

1.  Explain three reasons why labour markets may be imperfectly competitive

Demand for labour is described as derived demand – this means that the demand for workers is dependent upon the demand for the output of the final product.  In order for a labour market to be imperfectly comparative, there are distinct characteristics. In perfectly competitive markets workers are homogenous in their skills and we there is no power of monopsonys (geographical locations) to set the wage rate due to their power. However, in imperfect competitive markets, this is not the case as we see in perfect competitive labour markets, and the reasons for this is will be discussed.

The labour market may be imperfectly competitive due to the role of the job which requires the workers. In an industry such as dustbin collecting, it can be argued that the labour market is imperfectly competitive due to the risks with dustbin collecting as it is not a pleasant job to work in. Therefore, there may be non-monetary factors that will influence the amount of people that are willing to work in a particular industry – these non-financial rewards also influence the amount of labour available in a market. Therefore, to compensate, and to attract workers, the market in the dustbin industry is not perfectly competitive as the firms need to ensure that in order to attract workers, not only a high pay is needed, but also longer leisure times, and holiday times are needed in order to attract workers. Therefore, jobs that are not-desirable including anti-social hours may be argued to be imperfectly competitive due to not possessing workers that are willing to work at a given wage level, and instead, non-monetary factors need to be considered as a result.  

Labour markets may also be impact competitive due to not all workers being the same, they are not all homogenous. There are many factors that influence how able a worker is, such as the level of education and the productivity of each worker. Employee discrimination may also form part of this, as workers who have been educated at LSE for example, may be as well as an Oxford educated person, but the employee may perceive Oxford education to be superior. This also forms the bases of how experienced workers are too, not only with their past experience, but people who are also willing to work in the future under different circumstances. Therefore, especially in industries such as accounting, where skills are required, and then these industries may be imperfectly competitive, as now, there is not an infinite supply of workers.

Join now!

A final reason may due to the use of monopsony power by firms which is where a firm has power in an industry as it is a single dominant buyer of labour. This can be due to geographic reasons for example, in rural areas, if there is one main firm, then this may cause it to have monopsonic power and therefore they can influence the wage rate, thus, this is not a perfectly competitive labour market. The monpsonsits are price makers and in order to employ more workers, they have to increase the wage rate so that the marginal cost ...

This is a preview of the whole essay