Question

If a firm has market power in the labor market (e.g., a monopsony), compare the impact on wages and employment between increased union membership and an increased minimum wage. What is the term for both a monopsony and a union present in a labor market? Which of these two outcomes, an increase in union membership or an increase in minimum wage, is preferable based on your analysis? Explain.

Answer 1

Answer: Monopsony refers to a market situation where a particular firm has so much power in the market that it becomes the sole purchaser of a specified kind of labor. In contrary to the perfectly competitive market, in monopsony, the wage rates are relatively very low. In perfect competition, minimum wage above the market equilibrium leads to unemployment but in monospony, it creates employment opportunities as well as increases wages. Trade unions bargain with the employers regarding better working conditions for the workers, shorter hours of work and increased wages. Increased union membership will thus reduce wage inequality and increase employment. Thus, both increased minimum wage and increased union membership aims at increasing wages and employment.

According to my analysis, increased minimum wage is more favorable as unlike trade unions, minimum wage does not demand to reduce the working hours of the labor, nor does it specify incurring huge costs in maintaining better working conditions.