ChainWhat it assumes · how to break it
Start
One employer dominates hiring in a labour market, for example a large distribution warehouse in a small town, or the NHS as the main employer of nurses.
1
As a result, the firm faces the upward-sloping market supply curve of labour, which is its average cost of labour (ACL), so to hire one more worker it must raise the wage.
monopsony · average cost of labour (ACL)
monopsony · average cost of labour (ACL)
Best link to attack
Assumes: Workers have few other employers they can go to.
Assumes: Workers have few other employers they can go to.
But: If workers can commute to other towns, work remotely or retrain for other jobs, labour supply to the firm is elastic and its power is small.
2
This means the higher wage must also be paid to all existing workers, so the marginal cost of labour (MCL) lies above the ACL.
marginal cost of labour (MCL)
marginal cost of labour (MCL)
Assumes: The firm pays all workers doing the same job the same wage.
But: If the firm can pay only new recruits more, for example through signing-on bonuses, MCL is closer to ACL.
3
Consequently, the profit-maximising monopsonist hires only up to where MCL = MRP, fewer workers than the competitive level where the supply curve meets MRP.
MCL = MRP · profit maximisation
MCL = MRP · profit maximisation
Assumes: The firm aims to maximise profit.
But: The NHS is not a profit maximiser: its staffing depends on government budgets and its pay is set through pay review bodies, so the MCL = MRP rule does not describe how it hires.
End
Employment is lower than in a competitive labour market, at the level where MCL = MRP.
Evaluation chain
- E1However, the size of the employment gap depends on how few alternatives workers have.
- E2When workers can commute, work remotely or move between sectors easily, labour supply to the firm is elastic.
- E3As a result, the ACL curve is flat, MCL lies close to it, and the firm must pay close to the market wage to recruit.
- E4So monopsony cuts employment a lot only where workers are immobile, such as in isolated towns or specialist occupations with one main employer.
Another way to attack it: A minimum wage or a strong union can offset monopsony power: a wage floor set between the monopsony wage and the competitive wage raises employment towards the competitive level.
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Questions this answers
- Using a diagram, explain why a monopsony employer hires fewer workers than a competitive labour market.
- Assess the impact of monopsony power on employment.
- Evaluate the case for a minimum wage in a monopsony labour market.
Diagram
Monopsony labour market: ACL (the supply curve) slopes upwards and MCL lies above it and rises more steeply; MRP is the demand curve. Employment Qm is where MCL = MRP; the competitive level Qc, where ACL = MRP, is higher.
Reverse and related
Monopsony power weakens, for example as new employers open in the town → labour supply to the firm becomes more elastic and employment rises towards the competitive level.