Labor Demand under Monopsony: relaxing Assumption 3  There is only one demander of labor in the market.  Labor Supply Curve Facing a Firm  A competitive firm can expand its workforce infinitely (?) at the ongoing market wage rate because there are infinitely (?) many employers with similar businesses from which workers can be attracted. e.g.) fast food.  See  A monopsonist faces an upward-sloping labor supply curve, as it must pay higher wages to hire extra unit of workers.  See

MEL curves  MEL = W for a competitive firm  MEL > W for a monopsonist

Why MEL > W for a monopsonist?  A monopsonist faces a upward-sloping labor supply curve.  The firm must pay higher wages to all workers, not just to the last worker hired,  Numerical example LWTotal Labor Cost 5$10$50 6$11$66 Marginal expense of 6 th worker = $16 > $11 = W paid to all workers

Mathematical presentation - Supply curve; where - Total wage cost = - MEL = - for any L. - Assuming that W is a linear or convex function of L so that, ; The vertical distance between MEL and the labor supply function increases in L

 Demand function?  There doesn ’ t exist a “ Demand Function ” for a monopsonist. - Given the labor supply curve and its schedule of MRPL, there is only one profit-maximizing level of employment and only one associated wage rate, both of which are chosen by the firm.  How to find profit-maximizing level of E and W?  Profit-maximizing level of employment: MRPL = MEL as usual  Profit-maximizing level of the wage rate: the wage rate on the supply curve at the profit maximizing level of employment  Graphical Explanation: see Figure 5.4

Monopsonostic Conditions and the Employment Response to MW Legislation: see Figure 5.5  Conclusion: Both wages and employment can increase in the SR  Why does the firm increase employment?  With the MW, MEL decreases from W m ’ to W m.  Why CAN? - The conclusion is valid only when the MW level is set between W 0 and W m. - What happens if the MW is higher than W m ’ ? OR lower than W 0  In the LR, mandated wage increases that are accompanied by increases in employment will increase firms ’ labor costs and causes some firms to cease production (which of course reduces employment).

 The presence of monopsonistic conditions in the labor market offers an explanation for why estimated employment losses associated with minimum wage increases have been smaller than expected, given the elasticity of labor demand curves estimated from wage changes arising from market forces.

A Numerical Example: to be solved in class A monopsonist faces a labor supply curve given by L s = W, where W is the annual salary. a. What is the MEL to the firm of adding a second worker given that it must pay all employees the same wage? Is this greater than, less than, or equal to the wage paid to each of the two workers? Answer) $30,300 b. In general, the marginal expense of hiring additional labor for this firm is given by MEL=29, L. If the firm’s labor demand curve is given by L d = W, what is the profit-maximizing number of workers the monopsonist should hire? What is the salary the workers will be paid? Answer) L*=33, W*=$33,300 c. If the minimum annual salary has been increased from 32,000 to 34,000 based on the new minimum wage law, what is the expected employment level? Answer) Employment level under the new minimum wage = 40 > 33=L*