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How are wages determined in a competitive labour market?

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Alec Cranford eNotes educator | Certified Educator

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In a theoretical labor market where perfect competition exists, wages would be determined by the economic forces of supply and demand. Businesses would pay the minimum that workers were willing to work for. In this situation, there would be no interference from governments (in the form of, for example, minimum wage laws) that would affect wages. To elaborate further, let us look at the types of specific circumstances that would lead to rising or falling wages.

The supply of and demand for jobs, and the wages that were offered, might be affected by an external factor in a particular industry. Suppose, for example, some of the jobs that necessary to produce automobiles became mechanized (i.e., done by robots). Auto manufacturers would no longer require as many laborers, and therefore wages would fall. On the other hand, new jobs (perhaps in maintaining the new technology) would be demanded by businesses, and because the labor supply would be lower for these kinds of jobs, wages offered would have to be high. If enough people, incentivized by these higher-paying jobs, received training in the skills needed to do them, then wages would begin to fall as the labor supply met and even exceeded the demand.

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pohnpei397 eNotes educator | Certified Educator

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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.

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krishna-agrawala | Student

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.