Question

Discuss how wages are determined in labor markets. Explain how a monopsony market structure is affected by a price floor (minimum wage), and what is the effect of the monopsony of the local economy?

Answer 1

The wage determination under labour market:

Wages are determined by the supply of and demand for labour in the labour market under normal competitive conditions. Wages are determined at the point where supply and demand of labour are in the equilibrium means at the point where downward sloping demand curve (dd) intersects the upward-sloping supply curve (ss). The wage rate changes as per the change in demand and supply of labours. As shown in the below diagram:

Monopsony is a market situation when there is only one buyer it occurs due to the firms having market power to heir labours. The firms have power to employee labours so they set lower wages to increase their profits and it leads to exploitation of labours. When the minimum wages are set by the government in the form of the price floor and if the wages are higher than the wages set by Monopsony than it increases the cost for the forms and decreases their demand of labours while if the price floor(minimum wages) is set below the wage rate by Monopsony than it reduces the 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 society.