Analyse the difference shown by marginal revenue productivity theory between wage determination in perfect and imperfect labour markets. Discuss the proposition that, in imperfect markets, a trade union can only increase the wage rate by allowing a reduction in employment.

Mark scheme

Marking points from the official mark scheme (May/June 2017). The mark or mark type is shown in brackets.

1. [25] Analysis of difference between perfect competitive factor markets and imperfectly competitive markets. Wages may be increased by unions in imperfect markets without decreasing unemployment as long as it doesn't rise above point where mc=mr. This still leaves the firm with abnormal profit. Beyond this point, higher wages will result in a decrease in employment. Level 4 (18-25 marks): for a critique of the statement and a thorough explanation of the analysis of wage determination with a clear comparison of perfect and imperfect markets. The conclusion about employment should be clearly stated.