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  • Print publication year: 2016
  • Online publication date: May 2018

13 - Competitive and monopsonistic labor markets

from Book IV - Competitive and monopoly market structures


Labour, like all other things which are purchased and sold, and which may be increased or diminished in quantity, has its … market price.

David Ricardo

Professional football players earn more than ministers or nurses. Social workers with college degrees generally earn less than truck drivers, who may not have completed high school. Even the best full professor of history probably earns less than a mediocre assistant professor of accounting on most campuses.

Why do different occupations offer different salaries? Obviously not because of their relative worth to us as individuals. Just as there is a market for final goods and services – calculators, automobiles, and dry cleaning – there is a market for labor as a resource in the production process. In competitive labor markets, supply and demand are major forces determining the wage rate workers receive in different sublabor markets. And accounting and history professors are in decidedly distinct sublabor markets, because neither can do the other's jobs (or else some (hardly all) history professors might seek an accounting professorship to double or even triple their salaries).

By concentrating on the economic determinants of employment – those that relate most directly to production and promotion of a product – we do not mean to suggest that other factors are unimportant. Many noneconomic forces – such as social status, appearance, sex, race, and personal acquaintances – influence who is employed at what wage. Our purpose is simply to show how economic forces affect the wages paid and the number of employees hired. Such a model can show not only how labor markets work but also how attempts to legislate wages, such as minimum-wage laws, affect the labor market.

As noted in Chapter 3, the general principles that govern product markets govern labor markets, and the general principles that govern labor markets also apply to the markets for other resources, principally land and capital. The use of land and capital has a price, called rent or interest, which is determined by supply and demand. Furthermore, land, capital, and labor are all subject to the law of diminishing marginal returns. Beyond a certain point and given a fixed quantity of at least one resource, more land, labor, or capital will produce less and less additional output.

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