Question

What is a competitive labor market?

What is a monopsony?

Using an appropriate graph explain the effect of a minimum wage law on employment if the labor market is a monopsony.

Answer 1

1. In a perfectly competitive labor market like the product market, there are demand and supply curves but the commodity is labor in this case. Both demand and supply of labor determine employment and wages in the market. The industry determines the equilibrium wage and each firm takes it as given. The demand curve is the sum of all the demands of individual firms in the labor market and the supply curve represents the aggregate workers who are willing to provide labor at the given wages.

2.

Monopsony is a market structure where there are a single buyer and many sellers. A typical example is when there are a single employer and many laborforces willing to provide labor services.

3.

The effect of a minimum wage when the labor market is a monopsony implies that more labor will be employed because when a firm hires workers at a certain wage and then increase the wages then the increment is given to all the workers as the firm is not price taker in this case. If the government sets a minimum wage above equilibrium, the firm cannot truncate the wages by hiring fewer people and also cannot increase wages hence it hires more workers.