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
- 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.