Labour market failures

1. Immobility of labour

The immobility of labour is a failure that creates an excess supply of labour in some markets and a lack of supply in other areas. Occupational immobility is caused by the requirement of specialist skills for some occupations and geographical immobility due to social ties, the cost of living and lack of information.

2. Monopsony

Where a single firm is the only employer of a particular type of labour (more than 90% in reality). The monopsonist is a wage-setter, paying workers lower than they want and employing fewer of them than the equilibrium level.

Diagrmatic explanation of the effect of trade unions under monopsony

The equilibrium level of employment is at point A, where MRP = MFC. The MFC is the marginal factor cost, the additional cost of employing one extra worker. The distance AB represents the workers exploitation. Under perfect competition, a wage rate of Wc is paid to Lc workers. The monopsonist, in the absence of a trade union pays lower wages and employs fewer workers.

3. Trade unions

Trade unions aim to regulate the supply of labour aiming to increase wage rates, primarily by limiting supply to the market and creating a deficit. Under any market structure other than a monopsony trade unions can push only for either a pay rise or an increase in the size of the workforce.

These notes are from a lesson on 5th January 2005.

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