4.1.6.4 The determination of relative wage rates and levels of employment in imperfectly competitive labour markets Flashcards
What makes labour markets imperfectly competitive?
Monopsony power (single buyer)
Trade unions (collective bargaining)
Imperfect information (about jobs/skills)
Skill differentiation (labour not homogeneous)
What is a monopsony labour market?
Single employer dominates market (e.g., NHS in healthcare).
Can set wages below competitive equilibrium.
Diagram: Upward-sloping labour supply curve, MC of labour above supply.
How does monopsony reduce wages/employment?
Employs where MC = MRP (Q₂ workers).
Pays wage W₂ (on supply curve) < competitive wage (W₁).
Result: Lower wages + fewer jobs than perfect competition.
Draw a monopsony labour market. Label:
Supply (AC) curve
MC curve
MRP curve
W₂ and Q₂
MC above supply curve.
Equilibrium: MC=MRP → W₂ on supply curve.
Competitive comparison: W₁/Q₁ at S=D intersection.
How do trade unions affect wages?
Raise wages above equilibrium (e.g., threat of strikes).
May cause unemployment if above MRP.
Can counter monopsony exploitation.
Show union wage (Wₜ) vs. competitive wage (W₀).
Horizontal line at Wₜ > W₀.
Unemployment gap: Qₛ (supply) > Qᴅ (demand).
How does imperfect information distort labour markets?
Workers unaware of higher-paying jobs → accept lower wages.
Underinvestment in skills/training → lower productivity.
Reduces market efficiency.
Give a monopsony example and its impact.
Amazon in a small town: Can suppress wages below competitive level.
NHS for doctors: Controls wages due to lack of alternative employers.
Compare monopsony and competitive labour markets.
Aspect Monopsony Perfect Competition
Wage W₂ (lower) W₁ (higher)
Employment Q₂ (fewer jobs) Q₁ (more jobs)
Power Employer sets wage Wage-takers
What is the wage-employment trade-off for unions?
Higher wages (↑ worker income) vs.
Fewer jobs (if wage > MRP).
How can governments reduce monopsony power?
Minimum wage: Counteracts wage suppression.
Promote competition: Break up dominant employers.
Worker mobility programs: Reduce geographic monopsony.
Show how a minimum wage could fix monopsony exploitation.
Set min wage at competitive level (W₁).
Employment rises from Q₂ → Q₁ (MC=MRP at higher wage).
Are trade unions always harmful to employment?
No: In monopsonies, unions can raise wages without job losses (countering employer power).
Yes: In competitive markets, may cause unemployment if wages > MRP.
