Monopsony

A Monopsony is a labour market dominated by a single buyer of labour. This prevents a perfect labour market because a single firm has influence over the labour market.

ACL - Average cost of Labour = \(\frac{\text{Total wage costs}}{\text{Number of workers employed}}\)
MCL - Marginal cost of labour - Addition to cost from employing 1 more worker

NHS Example

The NHS is a Monopsony employer for Nurses. MCL for a Monospony is very high/steep because every time you attract new workers with a higher wage rate, the firm must increase the wages of all existing workers to match.

Monopsony diagram

In a competitive labour market the wage would be Wc and the quantity employed Qc. This would mean no profit as AC=AR. However, the monopsony uses the fact that it is the main employer to maximise profit (MC=MR) to limit employment to X and although there should be a higher wage, the monopsony pushed wages down to Wm since the workers don't have a choice but to accept the wage (they cannot lose workers, since there are no other firms able to hire them).

Solution to Monopsony

A monopsony can be partially solved by a trade union.

Monopsony solution diagram

Collective bargaining allows the trade union to get a higher wage for its workers, moving the wage close to the competitive wage.

Effectiveness of a trade union against a monopsony

  • Union density
  • WED/WES
  • Public support