Monopsony in the Labour Market

A2 Economics

Aims and Objectives

Aim:

To understand monopsony in the labour market

Objectives:

• Recap on the effects of trade unions on the labour market

• Define and explain monopsony

• Analyse the effects of a monopsony in a market with no trade unions, and with trade unions

Effects of Entry of a Union into a Previously Competitive Labour Market

Real Wage Rate/MRP

EmploymentQtu

Wc

Se

D=MRP

O

Wtu

Qc

• Union refuses to supply below Wtu

• Kinked supply curve WtuSe

• Consequence is that the wage rises and employment falls to Wtu; Qtu

• Competitive market WcQc

• Market no longer clears

• Excess supply exists (Unemployment)

Power of Trade Unions

• Qantas axe 1000 jobs and outsource maintenance from Austrailia

• http://www.bbc.co.uk/news/business-15507106

• Do some trade unions still have power?

• What could the implications be for the Australian economy and Qantas?

Monopsony Definition

A monopsonist employer is the sole employer of a particular type of labour.

In UK the state is a monopsonist employer of teachers and

doctors/nurses.

Monopsony Explained

• Occurs as a result of lack of competition on the demand side of the market.

• Monopolists have power with regard to price setting, so do monopsonists!

• Monopsonist employer can use power to drive down wages.

Consider a Monopoly….

Think about monopolistic power..

What determines just how powerful the monopolistic firm is in the market?

Answer: market share

The same is true of a monopsonist!

Power of Monopsonists

• The greater the proportion of employees in a market employed by a particular firm/state, the greater the power that firm/state will have.

Monopsony in a Market without Trade Unions

Real Wage Rate/MRP

EmploymentQm

Wc

S = ACL

D=MRP

O

Wm

Qc

MCL

Monopsony Diagram

• As a monopsonist the employer is not a wage taker.

• As industry’s sole employer it is faced with industry supply curve.

• Due to it’s power it can choose any point on the S curve.

• Due to upwards slope if the monopsonist wants to employ one more worker, if must offer a higher wage rate.

• Marginal cost is therefore greater than average cost of labour

Monopsony Diagram

• Because the increased wage must be paid not just to the extra worker, but all other workers in that industry.

• Monopsonist will hire an extra worker as long as they add more to revenue than to costs.(MRP>MCL)

Monopsony Diagram

• It will cease to hire extra workers where MRP=MCL.

• Equilibrium of Qm, where the monopsonist pays the lowest wage for this qty of labour (Wm).

• In a competitive market equilibrium = Wc:QC

• Therefore the result of monopsony power is to lower wage rates and employment levels.

Monopsony Diagram

• Monopsonist pays a wage lower than the marginal revenue product of the last worker.

• In a competitive labour market, the wage and MRP are equal.

• The extent to which wages less than the MRP are paid in the real world, indicates how powerful the monopsony is.

• Produce yourself a set of teaching notes and the monopsony diagram.

• You are then to have an economist speed dating session.

• You will have 3 minutes to tell your hot date all about monopsony in an attempt to ‘woo’ them with economics knowledge.

• Your date will then score you out of ten.