Question

Explain the employment and wage rate for a monopsony in an unorganized labor market

graphically. Explain graphically how the wage rate and employment level change when a

union is established in this market.

Answer 1

Dear Student,

Employment and wage rate for a monoposony in an unorganized labor market can be explained with the help of some classical theroy of Economics- A monopsony occurs when a firm has market power in employing factors of production (e.g. labour). A monopsony means there is one buyer and many sellers. It often refers to a monopsony employer – who has market power in hiring workers. This is a similar concept to monopoly where there is one seller and many buyers. For Example Federal Goverment release tendars for the consrtuction of large dams or hydrolic electricity projects.

Employment and wage rate can be diverse as per the prevelent of currency and geographical location of country.

In a monopsony market, the monopsonist firm—like any profit‐maximizing firm—determines the equilibrium number of workers to hire by equating its marginal revenue product of labor with its marginal cost of labor. For example : In order to attract the third worker, the monopsonist must offer an hourly wage of $20 instead of $15. However, because the monopsonist cannot discriminate among its workers (and risk alienating them), it must offer the higher $20 wage to its two current employees.

We know that in a competitive market, the imposition of a minimum wage above the equilibrium wage necessarily reduces employment, in the module on perfectly competitive labor markets. In a monopsony market, however, a minimum wage above the equilibrium wage could increase employment at the same time as it boosts wages

Graphical Explaination :

Below Figure 1.1  shows a monopsony employer that faces a supply curve, S, from which we derive the marginal factor cost curve, MFC. The firm maximizes profit by employing Lm units of labor and paying a wage of $4 per hour. The wage is below the firm’s MRP.

Figure 1.1. Minimum Wage and Monopsony. A monopsony employer faces a supply curve S, a marginal factor cost curve MFC, and a marginal revenue product curve MRP. It maximizes profit by employing Lm units of labor and paying a wage of $4 per hour. The imposition of a minimum wage of $5 per hour makes the dashed sections of the supply and MFC curves irrelevant. The marginal factor cost curve is thus a horizontal line at $5 up to L1 units of labor. MRP and MFC now intersect at L2 so that employment increases.

Thank You !!