Question

Suppose all workers and jobs in a hypothetical economy are homogenous. Explain why no wage differentials would exist if this economy were perfectly competitive and information and mobility were costless. Explain why wage differentials would arise if, on the other hand, information and mobility were imperfect and costly.

Answer 1

In competitive market , The mobility as well as the information are costless and the workers and jobs are homogeneous . If labour markets are very soaring competitive , with the indistinguishable workers and perfact mobility of labour , wages will move towards the identical equilibrium level . But in reality wages can defer greatly , even for the same job .

Formal education is an important determinant for good jobs and wages . Compariratively a university degree holder get a good job and wages , then a person who only obtains "A" levels of education . Some jobs require leangthy education and training , this is shows on higher wages . Human capital is the process of improving the quality of labour through education and training . Market forces will adjust the cost and benefit of education and training so that labour shortage in one area push up the wage rate .  

Now - a - days demand of skilled workers is very high because the value of the output produced by skilled workers will be higher and can command a higher price . Because of these things the ways of skilled workers are higher than the unskilled workers . Because of the appreciable human capital required , skilled workers anticipate a higher wage to uplift them to supply more labour . In a perfact competative market , the mobility and information are costless and the jobs and workers are homogenus . The labour will flow to various regions and to various employments in such a way that all workers are getting real wage and there is no wage differential .