In: Economics
How are wages set in the labor market? Are workers and companies Wage (price) setters or wage (price) takers or both? Explain how a company or a worker can be a wage setter, while other companies and workers are wage takers. Hint: A wage setter is where the company/worker decide how much to pay/how much the wages should be and wage taker is where the company pays what the market wages are, no more or less.
Answer
In a competitive labor market, wages are determined by the
supply and the demand for labor. In that kind of a market, usually
both the firms who hire the labor and the workers who supply it are
price takers. Neither will very impact the value of labor (the
wages).Insuch a case, wages are determined solely by supply and
demand. An {influx|inflow|flow} of immigrants, {for example|for
instance|as an example}, would increase {the supply|the
availability|the provision} of labor and drive down {the price|the
worth|the value} of labor. An increase in the overall demand for
goods and services would have an effect of driving up the price of
labor because it would increase the demand for labor.
A company can be a wage setter by determining the kind of wage
structure they formulate for their employees this happens when the
labor supply exceeds the available market demand creating a surplus
in the labor supply. Due to this surplus, the employee’s loose
bargaining power therefore has to accept the wage level that is
provided by the industry. Companies in such industry have the power
to dictate the kind of wage structure and the actual wage amount
they provide to employees