DEMAND FOR LABOUR According to this theory the wage is determined by the demand and supply of labour in the market. The demand for labour (DL) is a derived demand. The DL depends upon the demand for goods it helps to produce.

SUPPLY OF LABOUR The supply of labour (SL) in the economy depends on economic, social and institutional factors. The supply curve of labour for the industry is upward sloping from left to right. There is also backward bending supply curve. In this situation the SL initially goes upward from right to left but beyond certain wage rate the curve bend backward, i.e. it goes from right to left.

FIGURE-1: BACKWARD BENDING SUPPLY CURVE OF LABOUR Y O Labour hours L X Wage rate

FIGURE-2: WAGE DETERMINATION IN THE INDUSTRY UNDER PERFECT COMPETITION Y W’ W W” O Labour N X D S E

ANALYSIS OF FIGURES- 1&2 From Figure-1 the total supply curve of labour rises up to a certain wage level and after that it slopes backward. In figure-2 D and S represents the demand and supply curves of labour respectively. The two curves intersect at E. it means that at wage rate ow, quantity demanded of labour is equal to quantity supply of it. The market is clear at a point E only. Any other level of wage rate, say W’ > W will lead to unemployment and say, W” < W will result into excess demand for labour. Thus equilibrium at only OW level of wage rate.

FIGURE-3: LONG RUN EQUILIBRIUM OF THE FIRM

ANALYSIS OF THE FIGURE-3 In the long run under the perfect competition the equilibrium between demand for and supply of labour is established at the level where the wage rate is equal to the Value of Marginal Product (VMP) and Average Revenue Product (ARP) and thus the firms earn only normal profits. In the short-run the firms may make profit or loss at VMP = W ≠ ARP.

WAGES UNDER IMPERFECT COMPETITION MONOPSONY: In the market when a group of big employers come to an understanding not to compete for labour and thus act as a single hirer of labour. Monopsony also occurs when a big employer employs large number of a particular type of labour and he is in a position to influence the wage rate. If we see the Figure-4 in the below we find that under monopsony wage is lower and employment is less than under perfect competition. It can be seen that the labourer gets less wage than MRP. This deficit is called ‘monopolistic exploitation’ by Mrs. Robinson.

FIGURE-4: WAGE DETERMINATION UNDER MONOPSONY C H E Monopsony equilibrium will be at point E, i.e., MRP = MW. Here wage is less than MRP by EH,which is labour exploitation. Under perfect competition the equilibrium is at C, where MRP = AW. At this point both wage rate and employment are higher than monopsony situation.

TRADE UNION AND WAGE DETERMINATION Trade unions get some monopoly power in the labour market, so there is bilateral monopoly situation. The wage is determined by the negotiation between employer and the trade union. The trade union seeks to get maximum wage, whereas employers would like to fix the wage as low as he could considering industrial conditions, elasticity of demand for the product, elasticity of substitution between labour and capital, existing wage rates, labour productivity, cost of living, etc.

FIGURE-5: THE TWO LIMITS IN COLLECTIVE BARGAINING p The labour union will try to bargain maximum till W4, because beyond that the Producers will stop producing and hence loss of jobs. But wages do not come up to The marginal productivity level due to the weak bargain power of labour union. Labour union can improve the marginal productivity of labour through, advance technology, better skills and restricting the labour supply.