How are wages determined in a competitive labour market?
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In a competitive labor market, wages are determined by the supply of and the demand for labor. In such a market, both the firms who hire the labor and the workers who supply it are price takers. Neither can really impact the price of labor (the wages).
In such a case, wages are determined solely by supply and demand. An influx of immigrants, for example, would increase the supply of labor and drive down the price of labor. An increase in aggregate demand for goods and services would tend to drive up the price of labor because it would increase the demand for labor.
Prices of labour in a competitive labour market are determined by the equilibrium of demand and supply of labour, The supply of labour which refers to number of workers or labour hours available to an economy, is determined by factors like total population and prevalent culture and practice in terms of people capable of willing to take up employment. Demand for the labour is determined indirectly by the demand for goods and services that the manufactures wish to produce and sell. Both these demand and supply of labour is affected by the price of labour, that is the wages for which people are willing to work as employees. When manufacturers offer higher wages the supply of labour increases. On the other hand, manufactures are willing to produce more and, in turn, employ more labour when the wages fall.
The wage rate at which the demand and supply of labour is equal is the market equilibrium wage. This is the ruling wage rate in a competitive labour market.
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