14.1 Wage Differentials LO 1, 2
In a competitive labour market, wages are set by the forces of supply
and demand. Differences in wages will arise because some skills are
more valued than others, because some jobs are more onerous than
others, because of varying amounts of human capital, and because of
discrimination based on such factors as gender and race.
A union entering a competitive labour market can act as a monopolist
and can raise wages but at a predicted cost of reducing employment.
A profit-maximizing monopsonistic employer entering a competitive
labour market will reduce both the wage and the level of
employment.
Governments set some wages above their competitive levels by
passing minimum-wage laws. In competitive labour markets, a
minimum wage is predicted to reduce employment and create some
unemployment. In monopsonistic labour markets, a legislated
minimum wage (as long as it is not too high) can raise both wages
and employment.