Question

Wages is determined by the supply of and demand for the labor in the labor market under normal competitive conditions and by the number of people looking for job and the number of companies looking for employees. In addition, wage levels are shaped by the skill sets workers bring and employers need, as well as the location of the jobs being offered. When workers sell their labor, the price they can charge is influenced by several factors on the supply side and several factors on the demand side, (Pettinger, 2017). A monopsony is when there is many sellers but there is only one buyer, and is similar to a monopoly where there is one seller but many buyers. If there is a monopsony in a labor market the company is then able to determine the amount of people that they are willing to hire and at what wage. Monopsony is a market situation when there is only one buyer it occurs due the firms having market power to their labors. The firms have power to employee labors so they set lower wages to increase their profits and it leads to exploitation of labors. When the minimum wages is set by government in the form of price floor and if the wages is higher than the wages set by Monopsony than it increases cost for the forms and decreases their demand of labors while if the price floor (minimum wages) is set below the wage rate by Monopsony than it reduces cost of production for firms and increases their profits. The effect of the monopsony of the local economy: the lower wages set by monopsony reduces the welfare in the economy. It leads to redistribution of income and increases income inequality in the society, (Rocheteau, 2007).

Thoughts? What can be done different?

Answer 1

To prevent the economy from being unequal, government should put a price floor(minimum wage) equal to the subsistence level. Neither too high nor too low, so that the redistribution of income will be just and equal. If the wage rate will be too low, the firm's will gain a lot of profit and there will be reinvestment in the economy but as the income of the people (wage earners) will be low there will not be enough effective demand in the market for the products, which will ultimately reduce the profit in the next period. So to maintain a balance, wage rate needs to be set at at least the subsistence level. People will be Able to demand the products and there will be profit as well so the economy will not be unequal.