Labour Market Failure


    Labour Market Failure

    • Labour Market Failure occurs when supply and demand don’t result in an efficient allocation of labour resources
      • This can be seen in instances where there is a either a surplus or a shortage of labour, as well as cases where workers are in the wrong jobs, workers are poorly/aren’t trained, and where wage rates are low
    • The causes of labour market failure are:
      • Abuse of labour market power
      • Imperfect information
      • Skill shortages
      • Economic inactivity
      • Unemployment
      • Discrimination
      • Occupational immobility of labour

    Abuse of Market Power

    • Trade Unions are a source of power in the sale of labour services, and they may abuse their market power by pushing the wage rate above its equilibrium level, and thereby cause unemployment
    • Unions may also engage in job demarcation, which is where workers will only perform tasks outlined in their job description, and hence, labour flexibility will decrease.
    • Market power is also present on the demand side
      • Monopsonists and Oligopsonists are buyers of labour who have the power to determine the wage rate, which is likely to be lower than it would be in a perfectly competitive market.


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