Question

Compare the effects of imposing a minimum wage in a labor market when the market is a competitive market, a non discriminating monopsony, and a perfectly discriminating monopsony. Explain via example(s) how this could change the effectiveness of the minimum wage as an anti poverty tool in different local areas.

Answer 1

A Competitive market is the structure where the firms are free to enter and exit and firms, there exists an almost equal factors of production differentiation which results in the firms providing almost similar prices for the products. When in such an economy, a minimum wage in the labor market is introduced, the firms will now have to offer a minimum wage to every worker it employs. i.e. its cost of production will increase as a result of increase in the wage to be paid to the laborers. This increase in the overall cost of the production forces the employer or the producer to employ lesser number of laborers or employees so that he can reduce the wage cost. This reduction in the overall employment of the laborers forces the labor to join other industries in the market, thereby decreasing the overall production capability of the country.

                                          A non-discriminating monopsony is the structure where the number of consumers is no large that they start controlling the market functions, and they start bringing down the prices of the consumers. But in a non-discriminating monopsony, the consumers do not discriminate between the various kinds of producers. When in such an economy, a minimum wage in the labor market is introduced, the firms will now have to offer a minimum wage to every worker it employs. i.e. its cost of production will increase as a result of increase in the wage to be paid to the laborers. This increase in the overall cost of the production forces the employer or the producer to employ lesser number of laborers or employees so that he can reduce the wage cost. In a non-discriminating monopsony, the market supply is completely crippled as the producers are already under pressure of the consumers and the minimum wage implementation further cripples.

                                         A perfectly discriminating monopsony is the structure where the number of consumers is no large that they start controlling the market functions, and they start bringing down the prices of the consumers. But in a perfectly discriminating monopsony, the consumers discriminate between the various kinds of producers on the basis of their choice and preference. When in such an economy, a minimum wage in the labor market is introduced, the firms will now have to offer a minimum wage to every worker it employs. i.e. its cost of production will increase as a result of increase in the wage to be paid to the laborers. This increase in the overall cost of the production forces the employer or the producer to employ lesser number of laborers or employees so that he can reduce the wage cost. In a perfectly discriminating monopsony, the market supply is completely crippled as the producers are already under pressure of the consumers and the minimum wage implementation further cripples. This is the worst form of pressure, as the producer is crippled from three consequent forces.