By Valerie Wilson and William Darity Jr.

December 16, 2021

The assumption of a perfectly competitive labor market is central to some of the most widely accepted theories in the field of labor economics. On the demand side of this market structure are many firms seeking to fill identical jobs. On the supply side are many workers who possess the same set of requisite skills for a given job opening, all of whom have perfect information about wages and job conditions, and are able to move their labor freely, or without cost. The equilibrium price and quantity of labor—the market wage and level of employment, respectively—are those at which the amount of labor supplied by workers is equal to the amount of labor demanded by firms. Workers are paid the marginal product of their labor and in the long run, such a perfectly competitive labor market is theoretically at “full employment” since all who are willing to work at the market wage can find a job that pays that wage.

Under these market conditions, employers are assumed to be wage takers. In other words, they are unable to hire or retain workers for less than the going market wage because no worker would willingly accept a job for less, when they could easily transfer their labor to a competing firm that pays the market wage. In such markets, any differences in wages must be due to differences in productivity-related human capital.

In reality however, labor market structures are far from perfectly competitive, and employers are rarely so powerless as to have no discretion in setting wages below marginal productivity or paying different wages to equally productive and qualified workers. Since there is no absolute empirical standard of full employment—a condition implied by perfect competition—economists often disagree over what the “full employment” unemployment rate is or should be. Nevertheless, the nation’s actual unemployment rate has frequently been above even the far too conservative Congressional Budget Office (CBO) estimates of the “natural rate of unemployment,” or non-accelerating rate of unemployment (NAIRU). This has more often been the case than not during the last 40 years, a period that is characterized by rising inequality. Since 1979, the monthly unemployment rate has been below 6 percent only approximately half of the time. In that same period of time, the Black unemployment rate has fallen below 6 percent for just a brief five months preceding the COVID-19 pandemic. Further, the Black unemployment rate has remained nearly double the national rate of unemployment, and racial wage gaps have widened.