Monopsony in the Labour Market A2 Economics Aims and Objectives Aim: To understand monopsony in the labour market Objectives: • Recap on the effects of trade unions on the labour market • Define and explain monopsony • Analyse the effects of a monopsony in a market with no trade unions, and with trade unions • • Se Real Wage Rate/MRP Wtu • • Wc • • Union refuses to supply below Wtu Kinked supply curve WtuSe Consequence is that the wage rises and employment falls to Wtu; Qtu Competitive market WcQc Market no longer clears Excess supply exists (Unemployment) D=MRP O Qtu Qc Employment Power of Trade Unions • Qantas axe 1000 jobs and outsource maintenance from Austrailia • http://www.bbc.co.uk/news/business-15507106 • Do some trade unions still have power? • What could the implications be for the Australian economy and Qantas? Monopsony Definition A monopsonist employer is the sole employer of a particular type of labour. In UK the state is a monopsonist employer of teachers and doctors/nurses. Monopsony Explained • Occurs as a result of lack of competition on the demand side of the market. • Monopolists have power with regard to price setting, so do monopsonists! • Monopsonist employer can use power to drive down wages. Consider a Monopoly…. Think about monopolistic power.. What determines just how powerful the monopolistic firm is in the market? Answer: market share The same is true of a monopsonist! Power of Monopsonists • The greater the proportion of employees in a market employed by a particular firm/state, the greater the power that firm/state will have. MCL Real Wage Rate/MRP S = ACL Wc Wm D=MRP O Qm Qc Employment Monopsony Diagram • As a monopsonist the employer is not a wage taker. • As industry’s sole employer it is faced with industry supply curve. • Due to it’s power it can choose any point on the S curve. • Due to upwards slope if the monopsonist wants to employ one more worker, if must offer a higher wage rate. • Marginal cost is therefore greater than average cost of labour Monopsony Diagram • Because the increased wage must be paid not just to the extra worker, but all other workers in that industry. • Monopsonist will hire an extra worker as long as they add more to revenue than to costs. (MRP>MCL) Monopsony Diagram • It will cease to hire extra workers where MRP=MCL. • Equilibrium of Qm, where the monopsonist pays the lowest wage for this qty of labour (Wm). • In a competitive market equilibrium = Wc:QC • Therefore the result of monopsony power is to lower wage rates and employment levels. Monopsony Diagram • Monopsonist pays a wage lower than the marginal revenue product of the last worker. • In a competitive labour market, the wage and MRP are equal. • The extent to which wages less than the MRP are paid in the real world, indicates how powerful the monopsony is. • Produce yourself a set of teaching notes and the monopsony diagram. • You are then to have an economist speed dating session. • You will have 3 minutes to tell your hot date all about monopsony in an attempt to ‘woo’ them with economics knowledge. • Your date will then score you out of ten.