Monopsony Power

Characteristics and conditions

1. To operate, a monopsony needs buying power and sellers with limited alternatives, such as geographically immobile workers who cannot easily switch employer; the NHS as the dominant employer of nurses is a clear case, since nurses have few alternative buyers of their skills, and that lack of an outside option is exactly what hands the buyer its power.
2. As the only buyer it faces the whole upward-sloping supply curve, so to attract more workers it must offer a higher wage.
3. Its marginal cost of labour lies above the supply curve, because raising the wage to attract one extra worker means paying that higher wage to every existing worker too, so MCL rises faster than the wage itself.

Wage and employment setting

$$M{C}_L=MRP$$

1. Like any profit maximiser it hires up to the point where the cost of the last worker equals the revenue that worker generates, so it employs where MCL = MRP.
2. Having fixed that quantity, it does not pay MCL; it pays only the wage needed to attract that many workers, read down to the supply curve, which is lower.
3. The result is that both the wage and employment sit below the competitive level where supply meets MRP: the buyer deliberately restricts hiring in order to hold the wage down, gaining at workers' expense.

The monopsony diagram

1. Put the wage rate on the vertical axis and the quantity of labour on the horizontal axis.
2. Draw the upward-sloping supply of labour (S), the downward-sloping MRP curve, and the MCL curve above and steeper than supply.
3. Set employment where MCL cuts MRP, at Qm, below the competitive quantity.
4. Read the wage down to the supply curve at Qm, giving Wm, below the competitive wage; the vertical gap between MRP and Wm at Qm shows the surplus the employer extracts from each worker.

Costs and benefits

1. Employees lose out, since wages and employment are held below the competitive level.
2. Firms gain lower wage costs and higher profit, which may fund investment.
3. Consumers may benefit if the lower costs are passed on as lower prices.
4. Suppliers can be squeezed on the prices they receive, as when farmers sell to a dominant supermarket buyer.

Is monopsony power always harmful?

1. It usually harms workers and suppliers, because the buyer restricts its demand to force the wage or price below the competitive level and transfer the surplus to itself.
2. It also creates allocative inefficiency in the labour market, since employment is held below the level where MRP equals the supply wage.
3. But it is not always harmful: where a strong trade union or a monopoly supplier holds countervailing power, monopsony can offset it and pull the outcome back towards the competitive result, and lower input costs may reach consumers as lower prices.
4. On balance it depends on countervailing power and whether savings are passed on: strikingly, a monopsonist facing a binding minimum wage can actually raise both the wage and employment, so regulation can turn the harm around.