L23 - Imperfect Labour Markets Flashcards
What is a Monopsony?
- A monopsony is where there is one large buyer of a particular good or service
- A monopsony firm does not imply that it is a monopoly in output market
What is Assumption 1 of imperfectly Competitive Labour Markets?
A(1) –> Buyers of labour (firms) operate in a perfectly competitive output market
- The price for the output is taken as given
- They believe that they can sell as much of their produce as they want at the going
- price without affecting that price, so p = MR
- When buyers are price takers in the product market, MRP{L} = MR x MPP{L} = p x MPP{L}
What is Assumption 2 of imperfectly Competitive Labour Markets?
- A(2) –> The firm is a wage maker in the labour (input) market
- A wage maker can influence the wage at which it employs labour
- To employ more units of labour the wage rate must be higher:
- the labour supply curve it faces slopes upwards
THIS IS THE ONLY ASSUMPTION THAT IS DIFFERENT FROM PERFECTLY COMPETITIVE LABOUR MARKETS
What is Assumption 3 of imperfectly Competitive Labour Markets?
- A(3) –> Both buyers and sellers have complete information
- Workers are aware of available jobs and know the conditions of employment
- Employers know the amount of labour available and how productive it is
What is Assumption 4 of imperfectly Competitive Labour Markets?
- A(4) –> Workers are wage takers Each worker believes how much labour he/she supplies will not affect the market price.
- This has two parts to it:
- (a) a worker can supply as much as labour he/she wants, at a given wage
- (b) a worker’s supply choice leads to no reaction from other workers
What is Assumption 5 of imperfectly Competitive Labour Markets?
- A(5) –> Entry for workers is ‘free’
- A potential worker can enter the market without incurring costs that an incumbent worker would not incur
- No restriction on the movement of labour
- No barriers from unions or government
- Entry is often assumed to a long-run decision
- It takes time for workers to become educated, relocate, change jobs
What is the Appropriate Market Structure for Imperfectly Competitive labour Markets?
*Assumption (1), Assumption (2) and Assumption (5) imply many workers are equally productive, and buyers and sellers are fully informed
(A) SIZE and NUMBER OF SELLERS (workers) –> Many, small
- A change in worker’s supply has little effect on wage if it is small relative to total
(B) SIZE and NUMBER OF BUYERS (firms)–> One, large
- A change in how much the buyer purchases has a large effect on the total when it is large relative to the market
When does Equilibrium occur under Monopsony?
- The equilibrium is again determined by (1) the marginal input rule
- When there is only one buyer, its supply curve is the market’s supply curve
So, its supply curve slopes upwards - This is also the average cost (AC{L}) curve: S = AC{L} = w (wage)
What does this mean for the marginal cost curve?
- To employ another unit of labour, the wage has to rise.
This has two effects on total cost (TC{L}):
- 1. another unit is employed at wage w, so TC{L} increases w
- 2. all other units are employed at a slightly higher wage, so TC{L}
increases by sL where L represents the units employer at the lower wage, and s represents how much the wage increased (i.e. the slope of the supply
curve)
So, MC{L} is higher than AC{L}, because: MC{L} = w + sL > AC{L} = w for any L > 0
What does Equilibrium under Monopsony look like on a graph?
- With Wage on the y-axis and Quantity of Labour on the x-axis
- the upwards sloping supply line of Average cost of Labour AC{L}≡w
- and a steeper upwards sloping line of Marginal Cost of Labour MC{L}
- quarter circle line of marginal revenue of product labour curve –> MRP{L}= MPP{L} x MR
- to find equilibrium we use the marginal input rule
- profit maximising occurs at the point when MC{L}=MRP{L}
- therefore the equilibrium wage rate and quantity of labour are at the point on the AC{L}≡w directly below MC{L}=MRP{L}
- to compare with the wage rate and quanttiy of labour demand of a perfect competitive market we look at the point where AC{L}≡wMRP{L}
What is a Discriminating Monopsony?
Suppose a monopsonist can:
- pay workers different wages depending on their willingness to accept (WTA)
EXTREME:
i) the monopsonist knows each worker’s WTA
ii) can offer each worker an individual contract
How does this affect (MC{L})?
- To employ another unit of labour, the wage must rise – but only for the extra unit
For a discriminating monopsonist, there is only one effect on total revenue (TC{L}):
- 1. another unit is employed at the higher wage, so TC{L}
increases
- (2. all other units are employed at same wage, so no effect on TC{L})
So, MC{L} is equal to AC{L}
(since TC{L} increases by the wage rate for the unit w = AC{L})
What does Equilibrium under Discriminating Monopsony look like on a graph?
- With Wage on the y-axis and Quantity of Labour on the x-axis
- An upwards sloping supply line of AC{L}≡W=MC{LD}
- quarter circle line of marginal revenue of product labour curve –> MRP{L}= MPP{L} x MR
- to find equilibrium we use the marginal input rule
- this gives the equilibrium point at AC{L}≡W=MC{LD}=MRP{L}
- this is similar to a perfectly competitive equilibrium for the Quantity of labour they demand however unlike perfectly competitive equilibrium that charges a constant wage, a discriminating monopsony we change different wages to each unit of labour –> the triangle below the line AC{L}≡W=MC{LD}=MRP{L}
How can the 3 types of Labour Supply Markets be summarised?
- PERFECT –> wage determined by intersection of supply and demand curves
- The wage is W{pc} and there are L{pc} units of labour employed
- MONOPSONY –> equilibrium wage is W[1} and there are L{1} units of labour employed
- This is determined by the intersection of MC{L} and MRP{L}
- Compared to a perfectly competitive labour market:
- Less units of labour are employed and workers are paid a lower wage
- There is a deadweight loss
- DISCRIMINATING MONOPSONY –> there are L{pc} units of labour employed
= This is determined by the intersection of MC{LD} and MRP{L} - Same units of labour employed as under perfect labour markets
- But wage bill is lower, so the surplus for the firm is larger
- There is no deadweight loss
What are the Assumptions for Monopoly Unions?
We retain A(1), A(2), A(3) and A(5) from the monopoly slides:
1 - The firm operates in a perfectly competitive output market
2 -The firm and workers (sellers of labour) have complete information
3 - Firms are wage takers
5 - Entry for workers is ‘free’
The only change we’re going to make is:
A(4) –> Workers are wage makers
- Each worker is a member of a union (an insider), so his/her supply choice is
determined by the union. The union faces no competition from ‘outsiders’
- Effectively, we assume that the union sets a minimum wage
- Unions are commonly interested in either:
- (a) Maximising wages for their members ‘insiders’
- (b) Maximising employment
What is the Appropriate Market Structure of a Monopoly Union?
- A(1), A(2) and A(5) imply many workers are undifferentiated, and buyers and sellers are fully informed
(a) SIZE and NUMBER OF SELLERS (workers) –> One, large
- Coordinated action by the union has a large effect on the market supply curve.
- This is not possible if workers operate individually. They must act collectively as one
(b) SIZE and NUMBER OF BUYERS (firms) –> Many, small
- A change in how much the buyer purchases has little effect on market wage rate, if it is small relative to total
What is a Monopoly Union?
This model states that the monopoly union has the power to maximize the wage rate; the firm then chooses the level of employment.
