Monopsony in the Labour Market

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Presentation transcript:

Monopsony in the Labour Market A2 Economics

Aims and Objectives Aim: To understand monopsony in the labour market 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

Effects of Entry of a Union into a Previously Competitive Labour Market 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) Real Wage Rate/MRP Se Wtu Wc 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.

Monopsony in a Market without Trade Unions 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.