I think there are a couple of factors at play. Labor markets especially for highly skilled jobs tend not to be exactly the best examples of "free market" and "perfect competition". There seems to be a lot going on... imperfect information, differentiation, "cartels" on both sides...

Agreed, but wouldn't those factors also affect your scenario in which lower paid workers free up cash to raise salaries? I only meant to argue that the "what the market will bear" model is closer to reality than the scenario your presented, not that it is a perfect fit.