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CEP discussion paper
The Structure of Wages in What Should be a Competitive Labour Market
Stephen Machin and Alan Manning
June 2002
Paper No' CEPDP0532:
Full Paper (pdf)

JEL Classification: J5

Tags: wage dispersion; competitive model

This paper examines the structure of wages in a very specific labour market, for care assistants in residential homes for the elderly on England's 'sunshine coast'. This sector corresponds closely to economists' notion of what should be a competitive labour market as: (i) there are a large number of small firms undertaking a very homogeneous activity in concentrated geographical areas; and (ii) the workers they employ are not unionized, nor are they covered by any minimum wage legislation so that there are effectively no external constraints on the wage-setting process. We find that the structure of wages does not, in important respects, resemble what we would expect in a competitive labour market. We find there is a small amount of wage dispersion within firms and a correspondingly large amount between firms. And, the wage dispersion that is present does not seem to be closely related to the productivity related characteristics of workers. We propose a test of the hypothesis that unobserved labour quality can explain our findings and reject it. The paper concludes with a discussion of other possible explanations of the patterns in our data.