How Does a Monopsony Affect Wages and Employment?

A monopsony employer can pay lower wages and employ fewer workers than would be employed in a competitive labour market. Because it is the main buyer of labour in a market, workers have fewer alternative employers. A suitably set minimum wage can sometimes raise both wages and employment.

Scope: This is the monopsony-employer point within A Level Economics topic 8.3, Labour market forces and government intervention. It connects to the broader theme of government intervention studied at AS Level, but monopsony wage determination is A Level content.

Why can a monopsony pay less?

A monopsony is a market with one buyer; in a labour market, this means one employer buying workers’ labour. In practice, a firm may have monopsony power without being the only employer if workers have limited alternatives.

To attract more workers, the employer may need to offer a higher wage. If it must also raise the pay of workers it already employs, the marginal cost of labour (the extra cost of hiring one more worker) exceeds the wage paid to that additional worker. The firm hires workers up to the point where this extra cost equals the marginal revenue product: the extra revenue generated by the next worker. It then pays the wage needed to attract that number of workers. This leads to lower wages and employment than in an otherwise comparable competitive labour market.

What happens with a minimum wage?

Suppose a monopsony pays workers less than the competitive wage. A minimum wage set above the monopsony wage can increase the pay workers receive. It may also make additional hiring worthwhile, increasing employment. It depends on the level set: a minimum wage that is too high can instead reduce employment.

An exam mistake is to assume a minimum wage always causes job losses. That conclusion does not necessarily follow when the employer has monopsony power.