Labour Market Failure

Labour Market Failure

• Labour Market Failure occurs when supply and demand don’t result in an efficient allocation of labour resources
  • This can be seen in instances where there is a either a surplus or a shortage of labour, as well as cases where workers are in the wrong jobs, workers are poorly/aren’t trained, and where wage rates are low
• The causes of labour market failure are:
  • Abuse of labour market power
  • Imperfect information
  • Skill shortages
  • Economic inactivity
  • Unemployment
  • Discrimination
  • Occupational immobility of labour

Abuse of Market Power

• Trade Unions are a source of power in the sale of labour services, and they may abuse their market power by pushing the wage rate above its equilibrium level, and thereby cause unemployment
• Unions may also engage in job demarcation, which is where workers will only perform tasks outlined in their job description, and hence, labour flexibility will decrease.
• Market power is also present on the demand side
  • Monopsonists and Oligopsonists are buyers of labour who have the power to determine the wage rate, which is likely to be lower than it would be in a perfectly competitive market.