Monopsony in the Labour
Market
A2 Economics
Starter
• Define a monopsonist employer.
• Draw the diagram to show the impact of a
monopsony employer on the labour market.
MCL
Real Wage
Rate/MRP
S = ACL
Wc
Wm
D=MRP
O
Qm
Qc
Employment
Re-Cap on Effect of Trade Unions
• Unions will not supply labour below their
desired wage rate.
• Labour supply becomes perfectly inelastic.
Monopsony in a Market With Trade
Unions
• Due to perfect elasticity, even monopsonist
employers become a wage taker.
• National Union of Teachers and unions
determine wage rate, which must be taken by the
state (monopsonist employer).
MCL
Real Wage
Rate/MRP
Effective
Marginal Cost
S = ACL
Union can keep
increasing wages and
employment up to
here. Here
employment levels
will fall back.
Wc
Wm + tu
Wm
D=MRP
O
Qc
Qm
Qm
+ tu
Employment
Monopsony in a Market With Trade
Unions
• Market Clearing = Wc : Qc
• Monopsonist employer = Wm : Qm
• Trade Union = Wm +tu : Qm + tu
Monopsony in a Market With Trade
Unions
• Unions won’t supply below Wm+tu.
• Supply become perfectly elastic.
• Monopsonist employer (state) becomes a wage
taker.
• Marginal Cost is constant.
Monopsony in a Market With Trade
Unions
• However there is a limit to how many workers will
supply themselves at the union’s wage rate.
• Beyond this point a higher wage must be paid to
stimulate labour supply.
• Monopsonist faced with paying extra wage to all
workers and the MCL exceeds the ACL.
• Results in a kinked curve showing the effective MCL.
Monopsony in a Market With Trade
Unions
• The wage level (Wm+tu) and employment level
(Qm+tu) are greater than they would have been
without the involvement of a union.
• The closer the wage and the employment level is
to the clearing equilibrium the more successful
the trade union has been.
Do unions destroy jobs?
Or
Do they act as a counter to
monopsony power and save
jobs?
Effects of Unions on Monopsonist Firms
• Unions act as a counter to monopsony power,
and according to the diagram can actually save
jobs and influence the employment level and
wage rate.
• 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.