Wage Differentials in Non-competitive
Labour Markets
We have examined several explanations for why wage differentials exist
in competitive labour markets. Another explanation for wage differentials
is a non-competitive labour market. To study the influence of different
labour-market structures on wages, we will consider the case of an
industry in which all workers are identical and there is only one kind of
job. In this way, we eliminate the possibility that any wage differentials
are caused by differences between workers or differences between jobs.
Let’s examine two general cases. First, workers form a labour union and
exercise market power over setting the wage; that is, the labour union
acts as a monopoly seller of labour services. Second, a single firm is the
sole buyer of labour services; that is, the firm is a monopsony in the labour
market.
A Monopoly Union in the Labour Market
For the purposes of our discussion of labour markets, a labour union
an association that is authorized to represent workers in negotiations
with their employers. For this analysis, we will view the labour union as a
single supplier of labour.