A Monopsonist Pays Below the Competitive Wage

1. A monopsony is a labour market with a single, or dominant, buyer of labour.
2. It faces an upward-sloping labour supply curve.
3. So its marginal cost of labour lies above the supply curve.

The Monopsonist Employs Where MCL Equals MRP

1. The monopsonist employs where the marginal cost of labour equals MRP.
2. It then pays the lower wage read off the supply curve.
3. So both the wage and employment are below the competitive level.

Read the Wage Down to the Supply Curve

1. Draw the supply, marginal cost of labour and MRP curves.
2. Set employment where marginal cost of labour meets MRP.
3. Read the wage down to the supply curve, below the competitive wage.

Imperfect Information Is a Further Source of Labour Market Imperfection

1. When workers lack full information about pay and job vacancies, or employers lack full information about worker productivity, labour is misallocated and wages can settle above or below the competitive rate.
2. Imperfect information reduces the mobility of labour, because workers cannot easily find or move to the jobs that would pay them the most.
3. This weakens the operation of market forces, so wages no longer reliably reflect the marginal revenue product of labour.

Read the Wage off the Supply Curve

Worked Example: Monopsony Wage and Employment

1. A remote quarry is the only significant employer of manual labour in its town, so it is a monopsonist.
2. Its labour supply schedule shows $100$ workers willing to work for £8\pounds 8£8/hour, $120$ workers for £9\pounds 9£9/hour, and $140$ workers for £10\pounds 10£10/hour.
3. The total wage bill (wage $\times$ workers) is £800\pounds 800£800 at $100$ workers, £1,080\pounds 1{,}080£1,080 at $120$ workers, and £1,400\pounds 1{,}400£1,400 at $140$ workers.
4. The marginal cost of labour (MCL) for the extra $20$ workers $=$ change in wage bill $÷$ change in workers: (£1,080−£800)÷20=(\pounds 1{,}080 - \pounds 800) \div 20 =(£1,080−£800)÷20= £14\pounds 14£14 to move from $100$ to $120$ workers, and (£1,400−£1,080)÷20=(\pounds 1{,}400 - \pounds 1{,}080) \div 20 =(£1,400−£1,080)÷20= £16\pounds 16£16 to move from $120$ to $140$ workers.
5. Because MCL (£14\pounds 14£14, £16\pounds 16£16) always exceeds the wage needed to attract those workers (£9\pounds 9£9, £10\pounds 10£10), the MCL curve lies above the supply curve, exactly as the monopsony model predicts.

Describing the Monopsony Diagram

1. The vertical axis measures the wage rate (W) and the horizontal axis measures the quantity of labour (QL).
2. Draw the upward-sloping supply curve (S) and, above it, the steeper marginal cost of labour curve (MCL), since hiring one more worker forces the firm to raise pay for every existing worker too.
3. Add the downward-sloping demand curve (D = MRP); the monopsony employment level Qm is where MCL crosses MRP, above and to the left of the competitive employment level Qc, where S would cross D.
4. From Qm, draw a vertical line down to the supply curve (not to the MCL or MRP curves) to read off the monopsony wage Wm, which sits below the competitive wage Wc.
5. The rectangle between Wm and the MRP curve up to Qm can be shaded to show the monopsonist's gain from paying workers less than the value of what they produce.

Trade Unions Are Another Source of Labour Market Imperfection

1. A trade union that bargains a single wage on behalf of its members can turn the labour supply facing an employer effectively horizontal at that negotiated wage, much like a minimum wage.
2. This gives workers collective bargaining power they would lack individually, allowing the union to push the wage above what an unorganised competitive market would set.
3. The effect on employment depends on the market: in a competitive market a union wage above equilibrium creates unemployment, but against a monopsonist a union wage can raise both the wage and employment together, up to the point where the negotiated wage equals MRP.