8.3.7—Wages in perfect labour markets

In a perfectly competitive labour market, many employers and workers take the market wage as given. Equilibrium employment occurs where labour demand equals labour supply.

The wage reflects the value of the marginal worker to firms and the opportunity cost of that worker’s time. A wage above equilibrium creates excess supply; a wage below it creates excess demand, assuming adjustment is possible.

If the market wage is set above the intersection, more people want jobs than firms want to hire, creating unemployment. A wage below the intersection leaves vacancies or unmet labour demand.

The equilibrium wage is not necessarily fair or a living wage, and the competitive model does not describe monopsony or strong bargaining power.