Centralised vs decentralised labour markets
Labour markets are an important concept in economics. There’s one element in particular that can confuse students but you absolutely 100 per cent must be across this: centralised versus decentralised labour markets.
The best way to think about these concepts is to think in extremes. On one side you have a centralised type of labour market...then all the way on the other side you have a decentralised labour market.
To clarify: a labour market is a factor market (market for the factors of production, or resources) where demand for labour comes from firms, and where supply of labour comes from individuals. Equilibrium occurs where the demand for labour meets the supply of labour. And! The price in this market is wages.
Look at this here image of a labour market:
The market for labour. Notice: demand for labour comes from firms; supply of labour comes from people.
Now, let’s start with a centralised labour market. Here, the wages and conditions of workers are determined by the government. They are determined in one ‘centralised’ location. The government decides the wages and conditions for workers across the economy.
Just think about the word ‘central’ in the word ‘centralised’. A central location is one, main location where the action happens.
Jump to the other extreme. A decentralised labour market is the opposite of this. In a decentralised labour market, wages and conditions are determined in many places. They are determined in individual workplaces as unions bargain with employers; they are determined in negotiations between individual workers and their employers.
In a decentralised system, there is no ‘one’ decision about wages and conditions. Instead, there are many decisions, occurring all across the economy, all the time.
In Australia, we have shifted from a highly centralised labour market to one which is increasingly decentralised. Aside from setting minimum wages and conditions, the government may have no role in determining how much you get paid or what your conditions are. This will be determined in discussions between you, unions and your employer.
There are pros and cons of each system, and I’ll get into these in a future post. But one thing to think about is that in a highly centralised system there is no financial reward for greater productivity. If workers in a company produce more, they are not rewarded with higher wages or conditions as everyone gets the same wages and conditions. So there is no reward for being more productive and helping the economy increase output.