If a company needs to hire employees during a work shortage, how would they utilize the...

If a company needs to hire employees during a work shortage, how would they utilize the "Increase of supply" and "monopsony" concepts in order to attract potential employees?

Expert Solution

A labor market in which there is only one firm demanding labor is called monopsony. In this case the company hires employees during a work shortage and since the company is the single firm in the market we refer to it as monopsonist. an example of monopsony would be the only firm in a 'company town' where the workers work for this single firm.Generally we know when there is a increase in supply of employees the wage prices decline. let us now see what happens in this case.

wage-searching behaviour: the monopsonist(company) is the sole demander of labor in the market, the monopsonists demand for labor is the market demand for labor. the supply of labor that the monopsonist faces is the market supply of labor. unlike a firm operating in a perfectly competitive labor market, the monopsonist does not simply hire all workers that it wants at the equilibrium market wage. the monopsonist faces a upward sloping market supply curve that is it is a wage searcherer rather than a wage taker. if the monopsonist wants to increase the number of workers that it hires, it must increase the wage that it pays to all of its workers, including those whom he currently employs. the monopsonists marginal cost of hiring an additional worker thus will not be equal to wage paid to that worker because the monopsonist will have to increase the wage that it pays to all his workers.

let us now consider an example:

suppose the monopsonist wants to increase employees from 2 employees to 5employees.Now the wage per worker is given by: $10,$15,$20,$25,$30 respectively. total cost of labor is : $!0,$30,$60,$100,$150 respectively.similarly marginal cost of labor is $10,$20,$30,$40,$50. In order to hire the third worker monopsonist must offer an hourly wage of $20 instaed of $15. however because the monopsonist cannot discriminate among its workers, it offers a higher wage $20 wage to its two current employees. hence cost from hiring the third worker are $60(3*$20) and marginal cost from hiring the third worker is $30($60-$30). the marginal cost of $30 exceeds the new market wage of $20 beacuse the monopsonist must pay its current employees an hourly wage that is $5 higher then before.

Rahul Sunny answered 1 year ago

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