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
•
•
Se
Real Wage
Rate/MRP
Wtu
•
•
Wc
•
•
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)
D=MRP
O
Qtu
Qc
Employment
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.
MCL
Real Wage
Rate/MRP
S = ACL
Wc
Wm
D=MRP
O
Qm
Qc
Employment
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.