Question

1. Discuss a labor market with two sectors which have wage differentials. Illustrate the labor force dynamics between these two sectors and explain your graphs in words

Answer 1

Wage differential does not exist in perfectly competitive labour market but existence of wage differential refers to imperfect competitive labour market.There are five imperfect market scenario that can have wage differential in two sector labour market,

• If the workers are not homogeneous, the workers are different thus they will have different MRPs , their wages are different.Supply of workers can be different in two sector that can lead to have wage differential
• Non monetary facilities like pension, holiday, flexible work hours can be different in two sector which can leads to have a compensating wage difference.
• If labour is not perfectly mobile then wage can be different
• if the companies has the wage setting ability due to less number of employer then wage can be different.

Labour force dynamics that can be the reason of wage differentials in these two sectors are

Human capital differences because some job needed high training, skills than other where human capital development is also needed

formal education is also a determinant of the wage differential, lifetime earning vary directly with the former level of education

Skills of the workers is highly demanded for wage differentials Marginal cost differs for high skilled and low skilled workers.