The Impossibility of a Perfectly Competitive Labor Market

28 Pages Posted: 13 Mar 2006

See all articles by Bruce Evan Kaufman

Bruce Evan Kaufman

Georgia State University - Department of Economics

Date Written: February 2006


Using the institutional theory of transaction cost, I demonstrate that the assumptions of the competitive labor market model are internally contradictory and lead to the conclusion that on purely theoretical grounds a perfectly competitive labor market is a logical impossibility. By extension, the familiar diagram of wage determination by supply and demand is also a logical impossibility and the neoclassical labor demand curve is not a well-defined construct. The reason is that the perfectly competitive market model presumes zero transaction cost and with zero transaction cost all labor is hired as independent contractors, implying multi-person firms, the employment relationship, and labor market disappear. With positive transaction cost, on the other hand, employment contracts are incomplete and the labor supply curve to the firm is upward sloping, again causing the labor demand curve to be ill-defined. As a result, theory suggests that wage rates are always and everywhere an amalgam of an administered and bargained price.

JEL Classification: D41, J4, B52

Suggested Citation

Kaufman, Bruce Evan, The Impossibility of a Perfectly Competitive Labor Market (February 2006). Andrew Young School of Policy Studies Research Paper Series No. 06-04, Available at SSRN: or

Bruce Evan Kaufman (Contact Author)

Georgia State University - Department of Economics ( email )

P.O. Box 3992
Atlanta, GA 30302-3992
United States
404-651-2922 (Phone)
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