Imperfect competition in the labour market

It is increasingly recognized that labour markets are pervasively imperfectly competitive, that there are rents to the employment relationship for both worker and employer. This chapter considers why it is sensible to think of labour markets as imperfectly competitive, reviews estimates on the size of rents, theories of and evidence on the distribution of rents between worker and employer, and the areas of labour economics where a perspective derived from imperfect competition makes a substantial difference to thought

Monopsony and the Efficiency of Labour Market Interventions

Implicit in many discussions of labour market policy is the assumption that, in the absence of interventions, the operation of the labour market is well-approximated by the perfectly competitive model. The merits or demerits of particular policies is then seen as a trade-off between efficiency and equality. This paper analyses the impact of a variety of policies û the minimum wage, trade unions, unemployment insurance, progressive income taxation and restrictions on labour contracts û on efficiency when labour markets in the absence of intervention are monopsonistic and not perfectly competitive. A simple version of the Burdett and Mortensen (1998) model is used for this purpose.Labour market policy, Monopsony

Labour Supply, Search and Taxes

Classical labour supply theory is one of the most sophisticated parts of labour economics. Yet, there is no compelling theoretical reason to believe in an outcome on a classical labour supply curve and it is unclear whether it is a good empirical description of the way in which labour markets actually work. This paper uses the techniques of search theory to analyse the impact of changes in the tax system on incentives to work when individuals do not have flexibility of hours within jobs. It is shown how the traditional comparative statics are of some use but are rarely the whole story and some comparative statics results are surprising. For example, it is shown how a revenue-neutral increase in marginal tax rates will increase incentives to work.Labour supply, taxes, search

Pretty Vacant: Recruitment in Low Wage Labour Markets

This paper is a study of the process by which employers in five relatively low-wage British firms fill vacancies. It studies the determinants of the number and quality of applicants, the way in which these applicants are selected for interviews and offered jobs. The main conclusions are that the number of applicants is relatively small, the monetary and non-monetary aspects of jobs are important determinants of the number of applicants for jobs, but that firms do eventually fill virtually all vacancies. Non-employed job applicants have more difficulty in getting a job interview than those who are currently employed but, once interviewed, do not appear to face any further difficulties in getting employment.

A Generalised Model of Monopsony

Recent research in labour economics (e.g. the work of Card and Krueger, 1995, on the impact of minimum wages) has led to renewed interest in the appropriate model to use when thinking about the labour market. But, the standard textbook models of both perfect competition and monopsony are both implausible, though for different reasons. The competitive model because it assumes the wage elasticity of the supply of labour to the individual firm is infinite and the monopsony model because it assumes that an employer cannot do anything to raise employment other than raise the wage. This paper presents a more general but very simple model in which the employer can also raise employment by increasing expenditure on recruitment. Using this, it is shown how that division between perfect competition and monopsony is not the issue of whether the wage elasticity in labour supply is infinite or finite (as it is usually presented) but whether there are diseconomies of scale in recruitment. Using a unique British data set containing information on both labour turnover costs and the number of recruits, we present estimates that do suggest that there is an increasing marginal cost of recruitment.Labour Turnover

Imperfect Competition in the Labour Market

It is increasingly recognized that labour markets are pervasively imperfectly competitive, that there are rents to the employment relationship for both worker and employer. This chapter considers why it is sensible to think of labour markets as imperfectly competitive, reviews estimates on the size of rents, theories of and evidence on the distribution of rents between worker and employer, and the areas of labour economics where a perspective derived from imperfect competition makes a substantial difference to thought.Imperfect competition, labour markets, rents, search, matching, monopsony

Respect

Becker (1974) introduced to modern economics the idea that others care about what others think about them and derived many useful insights from this assumption. But he did not provide a very complete description of the general equilibrium of an economy in which people both demand respect from and supply respect to others. This paper analyzes the equilibrium price of respect, showing how it depends on the distribution of material endowments and discussing whether we would expect that, as society gets richer, the market for respect becomes more or less important. It explains why a demand for respect is a human universal in terms of Becker's observation that this helps to provide insurance where markets are absent. Although the demand for respect is universal, the activities that command respect have enormous cultural diversity - the paper explains how there can be many Nash equilibria if respect is withheld from those who violate prescribed behaviour. Finally the paper discusses where, in a modern economy, respect is demanded and supplied arguing it is primarily bundled up with other goods and services because of the nature of the costs of supplying it.Respect, Status, Pro-Social Preferences

Movin On Up: Interpreting the Earnings Experience Profile

Human capital theory provides the generally accepted interpretation of the relationship between earnings and labour market experience, namely that general human capital tends to increase with experience. However, there are other plausible interpretations e.g. search models generally predict that more time in the labour market increases the chance of finding a better match and hence tends to be associated with higher earnings. In this paper we show how a simple search model can be used to predict the amount of earnings growth that can be assigned to search with the residual being assigned to the human capital model. We show how a substantial if not the larger part of the rise in earnings over the life-cycle in Britain can be explained by a simple search model and that virtually all the earnings gap between men and women can be explained in this way. Overall, the evidence suggests that we do need to rethink our interpretation of the returns to experience in earnings functions.

The letters page

Alan Manning questions the value of researchers conducting debates about economic policy through the pages of newspapers.

The Plant Size-Place Effect: Agglomeration and Monopsony in Labour Markets

This paper shows, using data from both the US and the UK, that average plant size is larger in denser markets. However, many popular theories of agglomeration spillovers, cost advantages and improved match quality predict that establishments should be smaller in cities. The paper proposes a theory based on monopsony in labour markets that can explain the stylized fact that firms in all labour markets have some market power but that they have less market power in cities. It also presents evidence that the labour supply curve to individual firms is more elastic in larger markets.Agglomeration, Labour Markets, Monopsony, monopsony papers