The Impossibility of a Perfectly Competitive Labor Market

Using the institutional theory of transaction cost, I demonstrate that the assumptions of the competitive labor market model are internally contradictory and lead to the conclusion that on purely theoretical grounds a perfectly competitive labor market is a logical impossibility. By extension, the familiar diagram of wage determination by supply and demand is also a logical impossibility and the neoclassical labor demand curve is not a well-defined construct. The reason is that the perfectly competitive market model presumes zero transaction cost and with zero transaction cost all labor is hired as independent contractors, implying multi-person firms, the employment relationship, and labor market disappear. With positive transaction cost, on the other hand, employment contracts are incomplete and the labor supply curve to the firm is upward sloping, again causing the labor demand curve to be ill-defined. As a result, theory suggests that wage rates are always and everywhere an amalgam of an administered and bargained price. Working Paper 06-0

Job Market Signaling of Relative Position, or Becker Married to Spence

This paper considers a matching model of the labor market where workers, who have private information on their quality, signal to firms that also differ in quality. Signals allow assortative matching in which the highest-quality workers send the highest signals and are hired by the best firms. Matching is considered both when wages are rigid (nontransferable utility) and when they are fully flexible (transferable utility). In both cases, equilibrium strategies and payoffs depend on the distributions of worker and firm types. This is in contrast to separating equilibria of the standard model, which do not respond to changes in supply or demand. With sticky wages, despite incomplete information, equilibrium investment in education by low-ability workers can be inefficiently low, and this distortion can become worse in a more competitive environment. In contrast, with flexible wages, greater competition improves efficiency

Can pay regulation kill? Panel Data evidence on the effect of labor markets on hospital performance.

In many sectors, pay is regulated to be equal across heterogeneous geographical labor markets. When the competitive outside wage is higher than the regulated wage, there are likely to be falls in quality. We exploit panel data from the population of English hospitals in which regulated pay for nurses is essentially flat across the country. Higher outside wages significantly worsen hospital quality as measured by hospital deaths for emergency heart attacks. A 10 percent increase in the outside wage is associated with a 7 percent increase in death This is a heavily revised version o