Perfect Labor Markets
When looking at the market for labor, it is useful to make a similar distinction to that made in the theory of the firm: the distinction between perfect and imperfect markets.
Although in practice few labor markets are totally perfect, many do at least approximate to it. The assumptions of perfect labor markets are similar to those of perfect goods markets. The main one is that everyone is a wage taker. In other words, neither employers nor employees have any economic power to affect wage rates. This situation is not uncommon. Small employers are likely to have to pay the ‘going wage rate’ to their employees, especially when the employee is of a clearly defined type, such as an electrician, a bar worker, a secretary or a porter.
As far as employees are concerned, being a wage taker means not being a member of a union and therefore not being able to use collective bargaining to push up the wage rate. The other assumptions of a perfect labor market are as follows:
Freedom of entry. There are no restrictions on the movement of labor. For example, workers are free to move to alternative jobs or to areas of the country where wage rates are higher. There are no barriers erected by, say, unions, professional associations or the government. Of course, it takes time for workers to change jobs and maybe to retrain. This assumption therefore applies only in the long run.
Perfect knowledge. Workers are fully aware of what jobs are available at what wages and with what conditions of employment. Likewise employers know what labor is available and how productive that labor is.
Homogeneous labor. It is usually assumed that, in perfect markets, workers of a given category are identical in terms of productivity. For example, it would be assumed that all bricklayers are equally skilled and motivated.
Wage rates and employment under perfect competition are determined by the interaction of the market demand and supply of labor. Generally...
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