3.6.4 - Imperfectly Competitive Labour Markets

Question 1

What is a monopsony?

Answer 1

Only one buyer in a market.

Question 2

What is monopsony power?

Answer 2

The market power exercised in a market by the buyer of a good or the services of a factor such as labour, even though the firms is not a pure monopsonist.

Question 3

What are some examples of monopsony power?

Answer 3

NHS
Army

Question 4

What must the wage rate rise to, to attract the sixth worker?

Answer 4

£11.

Question 5

Why does the MC_L curve lie above the AC_L curve in monopsony markets?

Answer 5

In order to attract one more worker, you must raise the pay for all the other workers as well.

The MC_L in this case is the change of the total wage bill, not just for the extra worker.

Question 6

Why is the wage rate £16 in this instance?

Answer 6

Each of the incumbent workers gets a pay increase of £1, and there are 5 incumbent workers.

The new worker gets paid £11.

11 + (1 * 5) = 16

Question 7

Why is the wage rate £16 in this instance?

Answer 7

Each of the incumbent workers gets a pay increase of £1, and there are 5 incumbent workers.

The new worker gets paid £11.

11 + (1 * 5) = 16

Question 8

Why is the wage rate £16 in this instance?

Answer 8

Each of the incumbent workers gets a pay increase of £1, and there are 5 incumbent workers.

The new worker gets paid £11.

11 + (1 * 5) = 16

Question 9

How is the equilibrium employment and wage rate determined in this graph?

Answer 9

At the point where MRP_L is equal to MC_L is the monopsonist employment level.

The wage rate is massively reduced at point B.
As workers have no other alternative workforces, they are forced to work at the lower wage rate, and the monopsonist saves money.

If the firm is profit maximising, then L₁ is employed, and W₁ is paid.

Question 10

What are the main reasons for wage differences in imperfectly competitive labour markets?

Answer 10

Disequilibrium Trading
Imperfect Market Information
Occupational Immobility of Labour
Geographical Immobility of Labour
Discrimination

Question 11

Why is disequilibrium trading a reason for wage differences in imperfectly competitive markets?

Answer 11

As markets are constantly changing and evolving, patterns of demand also change. This means most markets are in disequilibrium at most times.

Although market forces will eventually force the market into equilibrium, at any point in time some disparities exist which reflects the disequilbrium conditions at the time.

Question 12

Why is imperfect market information a reason for wage differences in imperfectly competitive markets?

Answer 12

The status as an imperfectly competitive market suggests that there is imperfect conditions within the market as well.

Workers often have inaccurate information on rates of pay within other industries or even their own at a different firm.
Likewise, employers also have a lack of information on wage rates in other labour markets and their own markets.

Question 13

What is the occupational immobility of labour?

Answer 13

When workers are unable to move from one type of job to another.

Question 14

What is the geographical immobility of labour?

Answer 14

When workers are unable to move from one area to another in search of work.

Question 15

What is the geographical immobility of labour?

Answer 15

When workers are unable to move from one area to another in search of work.

Question 16

Why is occupational immobility of labour a reason for wage differences in imperfectly competitive markets?

Answer 16

This occurs when workers are prevented, either naturally or artificially from changing industry.

All workers are not homogenous, so one worker cannot immediately change industry.

This may be due to:
Qualification requirements
Trade Union Restriction

Question 17

Why is geographical immobility of labour a reason for wage differences in imperfectly competitive markets?

Answer 17

An ignorance of job opportunities due to familial or cultural ties alongside the costs of moving / travel may prevent workers from accepting a job vacancy in another area.

The most glaring cause of geographical immobility is currently the housing market in the UK. During price booms, Northern workers have found it impossible to move to the South, alongside a lack of affordable housing in the South.
Southern workers also choose not to move up North out of fears they will be unable to move back later.

Question 18

Why is discrimination a reason for wage differences in imperfectly competitive markets?

Answer 18

From a demand side, employers may choose not to employ someone due to their gender, religion or race.
From a supply side, some workers may choose not to work alongside someone due to their gender, religion or race.

Question 19

What are the wage rates and employment levels like under monopsonies?

Answer 19

Lower.

Question 20

Draw a diagram representing a monopsony employer.

Answer 20

Question 21

Why is the wage rate £16 in this instance?

Answer 21

Each of the incumbent workers gets a pay increase of £1, and there are 5 incumbent workers.

The new worker gets paid £11.

11 + (1 * 5) = 16