The Labor Market and Wage Determination
This chapter shifts the discussion from markets for goods to those for one factor of production, labor. The examination is consciously incomplete in that the supply of labor is taken as exogenous, not determined in the aggregate by wages or taxes or transfers or other economic forces in the system. Institutions are such that there can be, and often is, involuntary unemployment; and when labor is employed there is no close relation of the worker’s wage to his rate of substitution between leisure and income (or consumption). Minimum wage laws, custom, union pay scales, immobility due to costs of search and moving, are the dominant reasons for this. This is not to say that removing these would eliminate involuntary unemployment; indeed the removal of the first three of these might have undesirable consequences. Given that many employers are local monopsonists and that workers are unequal to one another in their bargaining strengths, inefficiencies in labor allocation and undesirable distributional effects might well be the consequence.
KeywordsReal Wage Full Employment Union Wage Wage Change Wage Determination
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