Assignment

Submitted by:

Muhammad Ali (16103123-003)

Submitted to:

Engr. Zafar Shakoor

Submitted for (Course):

Engineering Economics

DEPARTMENT OF Chemical Engineering

UNIVERSITY OF GUJRAT
Contents

Imperfect Competitive Labor Markets 3

Wages and Employment in Imperfectly Competitive Labor Market 3
Comparison 6
Conclusion 6
Imperfect Competitive Labor Markets
It is increasingly recognized that labour markets are pervasively imperfectly competitive, that
there are rents to the employment relationship for both worker and employer. At its most
general, ‘imperfect competition’ should be taken to mean that employer or worker or both get
some rents from an existing employment relationship. If an employer gets rents, then this
means that the employer will be worse off if a worker leaves i.e. the marginal product is
above the wage and worker replacement is costly.

If a worker gets rents then this means that the loss of the current job makes the worker worse
off – an identical job cannot be found at zero cost. If labour markets are perfectly competitive
then an employer can find any number of equally productive workers at the prevailing market
wage so that a worker who left could be costlessly replaced by an identical worker paid the
same wage. And a worker who lost their job could immediately find another identical
employer paying the same wage so would not suffer losses.

A natural question to ask is how important is imperfect competition in the labour market? As
explained in the introduction, this is really about the size of rents earned by employer and
worker from an on-going employment relationship. The experiment one would like to run is
to randomly and forcibly terminate employment relationships and examine how the pay-offs
of employer and worker change. We do not have that experiment and, if we did, it would not
be that easy to measure the pay-offs which would not just be in the current period but also
into the future.

The fact that there are rents in the typical job has important consequences for our view of
how labour markets work and how their performance can be improved. Many empirical
observations (e.g. equilibrium wage dispersion, the gender pay gap, the effect of minimum
wages on employment, employers paying for general training, costs of job loss for workers
with no specific skills to list only a few) that are puzzles if one thinks the labour market is
perfectly competitive are simply what one might expect if one thinks the labour market is
characterized by pervasive imperfect competition. One’s views of the likely effects of labour
market regulation should be substantially altered once one recognizes the existence of
imperfect competition. All labor economists should take imperfect competition seriously.

A competitive labor market is one where there are many potential employers for a
given type of worker, say a secretary or an accountant. Suppose there is only one employer in
a labor market. Because that employer has no direct competition in hiring, if they offer lower
wages than would exist in a competitive market, employees will have few options. If they
want a job, they must accept the offered wage rate.

Wages and Employment in Imperfectly Competitive Labor Market

Since the employer is exploiting its market power, we call the firm a monopsony. The
classical example of monopsony is the sole coal company in a West Virginia town. If coal
miners want to work, they must accept what the coal company is paying. This is not the only
example of monopsony. Think about surgical nurses in a town with only one hospital.
Employers that have at least some market power over potential employees is not that unusual.
After all, most firms have many employees while there is only one employer. Thus, even if
there is some competition for workers, it may not feel that way to potential employees unless
they do their research and find the opposite.

Think back to monopoly. The good news is that because the monopolist is the sole supplier
in the market, it can charge any price it wishes. The bad news is that if it wants to sell a
greater quantity of output, it must lower the price it charges. Monopsony is analogous.
Because the monopsonist is the sole employer in a labor market, it can offer any wage that it
wishes. However, because they face the market supply curve for labor, if they want to hire
more workers, they must raise the wage they pay. This creates a quandary, which we can
understand by introducing a new concept: the marginal cost of labor. The marginal cost of
labor is the cost to the firm of hiring one more worker. However, here is the thing: we
assume that the firm is determining how many workers to hire in total. They are not hiring
sequentially

There are a couple of things to notice from the table. First, the marginal cost increases faster than the
wage rate. In fact, for any number of workers more than one, the marginal cost of labor is greater than
the wage. This is because to hire one more worker requires paying a higher wage rate, not just for the
new worker but for all the previous hires also. We can see this graphically in Figure.

The Marginal Cost of Labor Since monopsonies are the sole demander for labor, they face
the market supply curve for labor. In order to increase employment they must raise the wage
they pay not just for new workers, but for all the existing workers they could have hired at the
previous lower wage. As a result, the marginal cost of additional hiring labor is greater than
the wage, and thus for any level of employment (above the first worker), MCL is above the
Market Supply of Labor.

 A monopsony will hire workers up to the point Lm where its demand for labor equals the
marginal cost of additional labor, paying the wage Wm given by the supply curve of labor
necessary to obtain Lm workers.

If the firm wants to maximize profits, it will hire labor up to the point Lm where DL = VMP
(or MRP) = MCL., as [link] shows. Then, the supply curve for labor shows the wage the firm
will have to pay to attract Lm workers. Graphically, we can draw a vertical line up from Lm
to the Supply Curve for label and then read the wage Wm off the vertical axis to the left.

How does this outcome compare to what would occur in a perfectly competitive market? A
competitive market would operate where DL = SL, hiring Lc workers and paying Wc wage. In
other words, under monopsony employers hire fewer workers and pay a lower wage. While
pure monopsony may be rare, many employers have some degree of market power in labor
markets. The outcomes for those employers will be qualitatively similar though not as
extreme as monopsony.
Comparison of labor market outcomes: Monopsony vs. Perfect Competition 

A monopsony hires fewer workers Lm than would be hired in a competitive labor market Lc.
In exploiting its market power, the monopsony can also pay a lower wage Wm than workers
would earn in a competitive labor market Wc.

Conclusion
A simple test of whether labour markets are imperfectly or perfectly competitive involves
estimating the wage elasticity of labour supply to a firm. Studies that have done this using
individual level data find that wage elasticities of labour supply are typically very.

Indeed, these estimates of the wage elasticity of labour supply to a firm are so far from the
perfectly competitive prediction of an infinite elasticity that it would be difficult to make a
case that labour markets are perfectly competitive. This has implications for policy based on
simplistic modeling of the labour market as perfectly competitive. It is interesting that a
parallel stream of labour economics literature, focusing on employer provided training and
the conditions under which firms will finance it, have reached similar conclusions.

Should imperfectly competitive models be used whenever researchers are modelling the
labour market? Some people would argue only in cases when the 21 predictions and
comparative statics of the imperfectly competitive model differ from those of the competitive
model. Of course, to know this, one needs to know precisely what the predictions and
comparative statics of the respective models are. However, there is now a growing – and
some would suggest, lamentable - trend for labour economists not to use any analytical
framework. The syllabuses of some labour economics courses

I have seen include little about imperfectly competitive models. Moreover, atheoretic
randomised experiments are increasingly being used in labour economics and represent an
alternative methodology that can reveal the effect of an intervention without the need for any
analytical framework. Nonetheless, for policymakers to be able to determine if an
intervention is required in the first place, there does need to be some analytical framework to
act as a guide. In the perfectly competitive model of the labour markets, for example,
typically no intervention or regulation would be justified. However, labour economics has
moved far beyond this position, with new ideas being incorporated into modeling wage
determination in imperfectly competitive labour markets and with the availability of better
datasets

Source
https://opentextbc.ca/principlesofeconomics2eopenstax/chapter/wages-and-employment-in-
an-imperfectly-competitive-labor-market/#:~:text=To%20maximize%20profits%2C%20a
%20monopsonist,also%20a%20lower%20equilibrium%20wage.