Introduction

An important assumption underlying the competitive market model is that of ‘full information’, whereby buyers know all sellers' selling prices. Because all buyers strive to obtain the lowest price, a unique market clearing equilibrium price emerges. In addition, resources are fully utilised: buyers demand exactly the number of commodities that sellers are willing to sell. In a labour market this amounts to ‘full employment’.

In practice, ‘unique’ market clearing prices are rare. This is true for markets in general, but is probably particularly true for labour markets, where price dispersion abounds. Thus, the highest paid worker in an occupation in a given town often earns twice as much as the lowest paid, and even within a given firm there is wage dispersion, with a spread apparently of up to 40% for the same job (Buckley, 1985, 12). For example, for switchboard operators within the same establishment, the highest paid worker exceeds the lowest paid worker by 22%, and for janitors the figure is 42% (Buckley, 1985, table 1). Nor do labour markets clear – there are often large pools of unemployed workers eager to find jobs. Of course some unemployment will occur in smoothly functioning labour markets as workers move between jobs. This is called ‘frictional’ unemployment. However, the rate of unemployment varies dramatically.