Wage determination in perfect and imperfect markets
In perfect labor markets, everyone is wage taker – both the employee and the employer. On the one hand, the employer and his firm cannot control the market as there are too numerous firms and the firm is price taker on the product market and labor market. On the other hand, the workers cannot control their wage as they have no economic power to do so or they are of a clearly definite type. In perfect competition there is a free movement of labor. Everyone can enter the labor market or to switch jobs. Moreover, both workers and employers have enough information on the labor market state – wages, demand, productive level of workers etc. The most common thinking in labor markets is that all workers in the same position are equally There are two driving forces concerning the supply of hours by an individual worker – while working, the worker sacrifices its leisure time and the work may be unpleasant. The worker experiences marginal disutility of work, which tends to increase as work hours increase. To deal with the marginal disutility of work, a wage could be raised. This would lead to people willing to work more hours in order to have a greater income and they are ready to sacrifice their leisure time or in other words the substitution effect appears. Still, with higher wages people tend to work less in order to have more leisure, which is the income effect and as a result we meet the backward-bending supply curve of labor. What determines wage rates in perfect competition is the number of qualified people, the wages and non-wage benefits in alternative jobs and the non-wage benefits or costs of the jobs. The wage of a worker is measured by the interaction of demand and supply in the labor market. A very useful tool for calculating the wage rate is the marginal productivity theory. As long as firms are concerned, they will try to maximize profit by employing workers until the...
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