Full Question:
Assume that the labor market for barbers is competitive and that it is differentiated into two groups: barbers who are bald (or going bald) and those who have a full head of hair.
Assume that the barbers in this market have identical hair-cutting ability, regardless of whether they are bald or not. Currently the equilibrium wage in the bald barber market is lower than that in the non-bald market. Further assume that the market for haircuts is competitive.
Refer to Scenario 19-4. If consumers do not discriminate between bald barbers and barbers with hair, then
a.the wages differential is likely to persist
b. wages in the market for barbers can never be in equilibrium
c. competitive pressure in the market for haircuts will eventually cause the equilibrium wage in both markets to be identical.
d. the equilibrium wage in the "bald" market will eventually fall
e. the equilibrium wage in the "hairy" market will eventually rise
Answer
The correct answer is C
Because consumers do no discriminate, and wages are totally determined by the industry, then competitive pressure in the market for haircuts will eventually effect an equalisation in the equilibrium wage in both markets.
Explanation
Please note the following assumptions:
- The market for hair cut is competitive
- The market for labour market for barbers is competitive (there is a difference between 1&2)
- There is identical skill in both markets (Bald vs Non-Bald);
- The equilibrium wage in the bald barber market is lower than that in the non-bald market.
Here are the reasons why market forces will force an equilibrium wage on both markets.
Perfect markets are characterised by
- Large Number of Buyers and Sellers
- Homogeneity of the Product
- Free Entry and Exit of Firms
- Perfect Knowledge of the Market
- Perfect Mobility of the Factors of Production and Goods
- Absence of Price Control
Also In a perfectly competitive labour market, where the wage rate is determined in the industry, rather than by the individual firm, each firm is a wage taker.
This means that the actual equilibrium wage will be set in the market, and the supply of labour to the individual firm is perfectly elastic at the market rate
Because of assumption 4 above, and bald know that they can get higher wages in the non-bald market, they will gravitate toward that market. When they do, the supply of of labour will force the demand for wages in that market down and wages will follow. Meanwhile in the bald market, those who remain will become inundated with work. A demand for more worker will surge. They will be able to pay because individuals don't discriminate and there is a shortage, they will pay more in the short run. So the demand for workers in the bald market will force those who left and possibly non-bald workers to flow in. Eventually, the market will stabilise itself because there is perfect flow of labour and information.
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