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Having examined the demand for and supply of labour separately, we now bring them together to analyse how wages and employment levels are determined in competitive labour markets. This lesson also explores why wages differ between occupations and individuals — a question that has occupied economists since Adam Smith (1776).
A perfectly competitive labour market has the following characteristics:
| Characteristic | Implication |
|---|---|
| Many buyers (firms) and many sellers (workers) | No single firm or worker can influence the wage |
| Homogeneous labour | All workers are identical in skills and productivity |
| Perfect information | Workers and firms know all wages and job opportunities |
| Perfect mobility | Workers can move freely between jobs and locations |
| No trade unions or government intervention | Wages are set purely by market forces |
In this model, the equilibrium wage is determined at the intersection of the market demand for labour (the sum of all firms' MRP_L curves) and the market supply of labour.
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