Introduction to Wages and Employment in Labor Markets

What you’ll learn to do: explain how wages are determined when employers or employees hold labor market power

Image of five miniature men in suits and ties. A large hand is picking up one of the men out of the line.

In the labor market, employers often hold most of the power in determining wages. This could especially happen if the firm has little or no competition in hiring employees, so workers have little alternative to accepting the wages that are offered. This is call a monopsony, and results in a lower level of employment and a lower equilibrium wage than what would be preferred by the competitive labor market.

Sometimes, however, the employees hold more of the power in determining wages. This is the case with labor unions, who negotiate wages through collective bargaining.


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