Determination of Wages

893 Words Jan 31st, 2018 4 Pages
It was crucial for this project to study the current body of literature on this topic in order to decide on which approach was best to take. Sapsford et al. (1993) claim that “at the simplest level of analysis, wages, viewed as the price of labour, are seen as being straightforwardly determined by the intersection of labour demand and supply curves in the market for labour.” (Sapsford et al., p. 155) Thus on one side we have the demand for labour by the firm, and on the other we have the supply of labour by workers. In cases where the market is in perfect competition the wage is given so the firm must choose the amount of workers it wants to employ at that wage. But in such a market at equilibrium the price of labour, i.e. the wage, will be equal to the marginal productivity of the worker. However, in imperfect markets, there can be monopsony firms who have market power and can choose the wage and the amount of workers that will maximise their profits. This latter theory is one of the reasons that was given to explain Krueger’s findings that an increase in the minimum wage actually increased employment which obviously contradicts main economic theory. The main idea was that in the case of a monopsony, higher wages may induce the firm to employ more people so as to find the profit maximising level of workers given that wage. But this project will not focus on the…
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