4.1.6.4 Determination of wages and employment in imperfectly competitive labour markets

Question 1

Sources of labour market imperfection

Answer 1

• Monopsony power
• Trade unions
• Imperfect information

Question 2

Define monopsony

Answer 2

A market w/ a single dominant buyer, such as the govt in relation to state schoolteachers

Question 3

How does a monopsony labour market work?

Answer 3

• Employer can use market power to reduce the wage rate and level of employment below those of a perfectly competitive labour market
• MC of employing workers > AC
• To attract additional worker - firm has to pay more to this worker as well as to all other employees

Question 4

Monopsony diagram

Answer 4

• To maximise profit - the monopsonist employs workers where MRP = MC - results in a wage rate of W1 and Q1 of labour employed
• The wage rate and level of employment both below those that would exist in a competitive labour market

Question 5

How do trade unions cause imperfections in a labour market?

Answer 5

Can bargain for wages above the competitive (market clearing) wage.

Question 6

How does imperfect information lead to imperfections in a labour market?

Answer 6

Workers may suffer from poor information - unaware of better jobs elsewhere
- Also enables firms to have monopsony power

Question 7

Why does the Supply (of labour) equal the average costs (of labour)?

Answer 7

SL tells us the number of workers that will actually work at different wage rates
- Is linear and upward sloping

ACL - TCL/Q of workers = W x Q of workers/Q of workers - Qs cancel out

Therefore - ACL = wage